Expert Comment: Is the dollar’s dominance crumbling?

Monday 3rd Nov 2025, 3.15pm

The world is edging toward a financial storm with few safe harbours in sight. What began as warnings about “the end of America’s exorbitant privilege” has become front-page news.

The dollar’s dominance – long seen as unassailable – is now under real strain as global investors, central banks, and even US allies start hedging against a post-dollar world.

In Washington, President Trump’s second term has brought fiscal recklessness, politicised monetary policy, and weaponised finance. The result: confidence in the US dollar as the world’s reserve currency is eroding fast. The consequences of that loss could make the 2008 financial crisis look mild by comparison.

But a reserve currency must rest on six pillars: macroeconomic stability, liquid financial markets, central bank independence, capital mobility, rule of law, and geopolitical trust. The current US administration has weakened every one of them.

How the dollar became the world’s pillar – and why it’s now cracking

For decades, America’s “exorbitant privilege” has allowed it to borrow cheaply, finance deficits without fear, and print money without stoking inflation. Foreign governments willingly held US Treasuries, trusting that they were the world’s safest asset. That trust underpinned the entire global financial order.

But a reserve currency must rest on six pillars: macroeconomic stability, liquid financial markets, central bank independence, capital mobility, rule of law, and geopolitical trust.

The current US administration has weakened every one of them.

• Debt and deficits are exploding. Tax cuts without spending restraint have pushed public debt to record levels.
• Financial market trust has been shaken by repeated threats of default during debt-ceiling standoffs.
• Federal Reserve independence has been eroded by open political pressure and loyalty tests for central bankers.
• Dollar access has become a political weapon—used to sanction rivals and even punish allies.
• Rule of law is no longer seen as impartial when executive orders freeze foreign assets or impose tariffs at whim.
• Geopolitical trust has collapsed under “America First” disengagement from international institutions.

Add to this an unpredictable foreign policy and erratic fiscal management, and the world begins to ask a dangerous question: if the dollar can no longer be trusted, what comes next?

A realignment away from the dollar is unlikely to happen smoothly. It would erupt like a financial tsunami. Investors would dump US Treasuries, yields would soar, and the dollar would plunge. Central banks would scramble into euros, yuan, or gold.

The mechanics of panic

In global finance, confidence is everything. Once enough investors believe the dollar’s dominance is at risk, their actions – selling dollar assets, diversifying reserves – make that belief self-fulfilling.

A realignment away from the dollar is unlikely to happen smoothly. It would erupt like a financial tsunami. Investors would dump US Treasuries, yields would soar, and the dollar would plunge. Central banks would scramble into euros, yuan, or gold.

The resulting shock could send tremors through every corner of the global economy – from pension funds and mortgages to emerging-market debt and corporate finance.

The problem is that no currency or asset is ready to absorb the trillions currently parked in dollar-denominated assets.

The eurozone lacks a unified fiscal system. China’s financial markets remain opaque and tightly controlled. Safe-haven markets like Germany, Japan, and Switzerland are simply too small. Even gold and IMF Special Drawing Rights are limited in scale and liquidity.

The result would be a global scramble for safety with nowhere to run. In that vacuum, panic feeds on itself, fragmenting the global system into rival financial blocs. 

Cryptocurrencies also empower the “grey economy” – facilitating sanctions evasion, illicit trade, and tax avoidance – further eroding the dollar’s central role in the shadow financial system. The more economic activity shifts onto decentralised rails, the less influence US monetary policy retains

The crypto wildcard

Digital currencies are adding a volatile new dimension.

Stablecoins – cryptocurrencies pegged to the dollar – now hold hundreds of billions in short-term Treasuries. If confidence falters and redemptions surge, these issuers could dump Treasury bills en masse, triggering a liquidity crisis in the very market that anchors the global financial system.

Meanwhile, central bank digital currencies (CBDCs) are advancing fast. China’s e-CNY, the EU’s digital euro, and BRICS payment experiments all aim to bypass dollar-based networks like SWIFT. These systems could soon create parallel payment infrastructures, fragmenting financial oversight and weakening global coordination.

Cryptocurrencies also empower the “grey economy” – facilitating sanctions evasion, illicit trade, and tax avoidance – further eroding the dollar’s central role in the shadow financial system.

The more economic activity shifts onto decentralised rails, the less influence US monetary policy retains. 

If the dollar’s dominance collapses, the world will not transition neatly to a new order – it will splinter.

A fragmented future

If the dollar’s dominance collapses, the world will not transition neatly to a new order – it will splinter.

Financial flows will follow geopolitical loyalties. Capital will be allocated based on security alignments, not market efficiency. Liquidity will dry up. Developing economies will be hit hardest, facing higher borrowing costs and currency instability.

International institutions like the IMF, World Bank, and BIS rely on global coordination to manage crises. Fragmentation would cripple them. Without shared rules or trusted assets, every shock – from climate disasters to pandemics – would hit harder and last longer. Global downturns would become more frequent and more protracted.

Worse still, financial fragmentation deepens political division.

Competing blocs – US and its allies, China and the BRICS, Europe somewhere in between – would increasingly weaponise finance: sanctions, capital controls, reserve seizures.

As economic interdependence erodes, so too does the deterrent against conflict. History tells us that when trade and finance divide into rival camps, the risk of confrontation rises. 

The dollar’s fall is not just an American problem – it’s a global one. The privilege may be America’s, but the stability it provides belongs to everyone.

Beyond “exorbitant privilege”

Commentators often describe this moment as the potential end of America’s “exorbitant privilege.” That framing misses the point.

The dollar’s fall is not just an American problem – it’s a global one. The privilege may be America’s, but the stability it provides belongs to everyone.

If the dollar’s reserve-currency role unravels, the result will not be a fairer system – it will be chaos: weaker growth, unstable exchange rates, and higher political risk across the board.

Rebuilding a stable financial order after such a collapse would take decades. 

The world’s financial future is hanging in the balance. What happens next will depend less on markets than on political will – whether we choose fragmentation and fear, or integration and trust.

The real question

The real question is not whether America can keep its privilege, but whether the world can avoid a financial system built on distrust and division.

The solution lies not in nationalist retrenchment but in renewed global cooperation – on fiscal responsibility, digital currency governance, and the shared stewardship of monetary stability.

The world’s financial future is hanging in the balance. What happens next will depend less on markets than on political will – whether we choose fragmentation and fear, or integration and trust.

Dennis Snower is an International Research fellow at the University of Oxford’s Saïd Business School and Professorial Research Fellow at The Institute for New Economic Thinking at the Oxford Martin School.  He is founding President of the Global Solutions Initiative and President Emeritus of the Kiel Institute for the World Economy. 

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