Credit: Photo by Adam Nir on Unsplash.

Last month, the New York Fed reported that the share of global central banks’ holdings of U.S. bonds has fallen to a decade low. An indication that foreign demand for dollar-denominated assets is declining, this trend reflects a larger ongoing effort to move away from the dollar. 

The U.S. dollar is currently the preferred currency in most international transactions and foreign reserves. Its strength has long been a cornerstone of American dominance, helping to sustain the country’s debt and providing Washington leverage in international trade and sanctions enforcement. Expanding adversary efforts to upend US economic influence by moving away from the dollar pose a threat to American power overseas, but these efforts are unlikely to produce serious results in the foreseeable future. 

With the establishment of the Bretton Woods system in 1944, the dollar gained status as the global reserve currency. Countries around the world pegged the value of their currencies to the dollar, while the dollar itself was fixed to gold. Even after the U.S. abandoned the gold standard in 1971, other countries remained pegged to the dollar due to its stability. 

Dollar dominance provides important economic advantages to the United States. The dollar’s reserve currency status reduces interest on U.S. borrowing and increases the volume of national debt the country can sustain. A strong dollar also lowers import costs, making foreign goods cheaper for American consumers.  

Critically, the dollar gives the U.S. powerful leverage against its adversaries through financial sanctions. The currency has remained the principal vehicle in the foreign exchange market, accounting for roughly 88% of global transactions. These transactions must pass through U.S.-based correspondent banks, which falls under U.S. jurisdiction. As a result, the U.S. can monitor, restrict, or freeze dollar transactions linked to sanctioned entities. For example, after Russia invaded Ukraine in 2022, the Biden administration introduced sanctions targeting more than 80% of Russia’s foreign exchange transactions, severely damaging both its GDP and living standards. 

Fearing Washington’s ability to weaponize the dollar, several countries have begun pushing for an alternate economic architecture to reduce their reliance on this currency—a process known as de-dollarization. This effort has been led largely by China, which is steadily expanding investment channels and promoting renminbi (RMB)-denominated bilateral trade settlements to internationalize its currency. Additionally, since 2022, Russian banks have been transitioning to China’s RMB-based Cross-Border Interbank Payment System. 

If such initiatives gain traction, global demand for the dollar will decline, leading to a broad depreciation of U.S. assets and higher borrowing costs. This is especially significant to the U.S. national debt, as a devalued dollar would mean higher interest on U.S. debt repayments and consequently increase the likelihood of a default.  

Domestic policy uncertainty also takes a toll on the dollar’s strength. The Trump administration’s fluctuating trade policy, coupled with the President’s criticism of the Federal Reserve, have contributed to eroding confidence in the dollar. This year, the dollar has fallen more than 10% in value and is expected to remain weak in the coming months. 

Nevertheless, the dollar continues to dominate, but trends from the past 20 years suggest that foreign governments are diversifying their portfolios. The dollar as a share of global reserves has shown a steady decline from 65% to around 57% between 2016 and 2024. However, this has not yielded an increase in the shares of the other “big four” currencies (the euro, yen, and pound); rather, the past decade saw an increasing share of nontraditional reserve currencies such as the Chinese renminbi, which indicates that other countries are considering alternative options. 

With this in mind, any alternative to the dollar still faces serious challenges to becoming the new preferred reserve currency. For example, significant structural limitations are hindering China’s efforts to internationalize RMB. China maintains strict capital controls, reducing global confidence in the RMB’s liquidity and convertibility. The Chinese financial system also lacks the transparency and institutional trust underpinning Western markets. Moreover, China’s bond market remains far smaller and less liquid than the United States’ ($21 trillion versus $51 trillion, respectively), further limiting international support for the RMB as a reserve currency. 

Although foreign competitors and domestic forces are unlikely to overturn the dollar’s dominance in the foreseeable future, it is evident that a gradual shift is underway. If the U.S. hopes to safeguard the economic influence and benefits of dollar dominance, it must reinforce traditional policies that have built trust in the American financial system and minimize disruptive actions to ensure the dollar remains competitive with emerging alternatives. 

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