This article is part of ONEST’s Financial & Geopolitical Literacy Series, made possible by generous donors who support independent ONEST journalism and allow us to keep this reporting public.
For decades, Americans have lived with an extraordinary economic advantage that is easy to overlook precisely because it feels normal.
Much of the world saves in dollars. Governments hold dollars. Companies borrow in dollars. Commodities are priced in dollars. Banks lend in dollars. International transactions frequently pass through dollar-based financial institutions even when neither side of the transaction is American.
This gives the United States something no other country possesses on the same scale: the ability to issue the currency that much of the rest of the world needs.
But what would happen if that began to change?
The answer is neither that the dollar is about to collapse nor that its global position is guaranteed forever.
A more realistic scenario would be gradual: countries diversify their reserves, companies conduct more trade in other currencies, alternative payment systems expand, investors demand higher returns to hold U.S. debt, and the world slowly becomes less dependent on the American financial system.
If that happened far enough and for long enough, the consequences would eventually reach far beyond central banks and foreign exchange markets.
They could affect U.S. borrowing costs, mortgage rates, inflation, federal spending, American purchasing power and Washington’s ability to finance global power.
Calling the dollar the world’s “reserve currency” is convenient, but incomplete.
The dollar occupies several positions at once.
Central banks hold it as a reserve asset. International companies use it to price and settle trade. Governments and corporations issue debt denominated in dollars. Banks conduct dollar lending across borders. Investors use dollars to move between currencies and financial markets.
That network remains enormous.
In the first quarter of 2026, the U.S. dollar accounted for 57.13% of global foreign-exchange reserves, according to the International Monetary Fund. The euro was a distant second at 20.03%, while China’s renminbi represented just 1.99%.
And reserves are only one measure.
In the Bank for International Settlements’ latest global survey, the dollar was on one side of 89.2% of all foreign-exchange transactions. Because every FX trade involves two currencies, the shares add up to 200%, but the comparison still demonstrates just how deeply embedded the dollar is in global markets.
The Federal Reserve has similarly estimated that roughly 55% of international and foreign-currency banking claims and around 60% of liabilities are denominated in dollars.
This creates an important lesson:
Dollar dominance is not one switch that can simply be turned off. It is an ecosystem.
And ecosystems generally change slowly.
Not simply because the United States declared that it should.
A global currency needs several things: large economy behind it; open financial markets where enormous amounts of money can move relatively freely; a huge supply of assets that investors believe they can buy and sell quickly...
And it needs enough confidence that governments, companies and investors are comfortable storing significant portions of their wealth there.
The United States provides something particularly difficult to replicate: the Treasury market.
Foreign governments, pension funds, banks, companies and investors can place enormous amounts of capital into U.S. government securities in a market that is unusually large and liquid.
That matters because a reserve currency needs somewhere for all those reserves to go.
Owning dollars alone is not very attractive. Central banks want assets that are safe, liquid and interest-bearing.
U.S. Treasury securities have historically supplied them at a scale few alternatives can match.
This creates a reinforcing cycle.
Countries use dollars because everyone else uses dollars. Companies invoice trade in dollars because their suppliers, banks and customers already operate in dollars. Banks maintain dollar infrastructure because their clients need dollars. Investors hold dollar assets because dollar markets are enormous and liquid.
Economists call these network effects.
Replacing the dollar therefore requires more than inventing another currency.
The alternative must compete with the entire network built around it.
Probably not through one dramatic announcement from Beijing, Moscow, Riyadh or other BRICS countries.
It would more likely happen through accumulation.
Imagine several changes occurring simultaneously over a decade or two:
Central banks gradually reduce the percentage of reserves they hold in dollars.
Countries sign more agreements allowing bilateral trade to be settled in local currencies.
Commodity producers accept more payments in euros, renminbi or other currencies.
New payment systems make it easier to conduct international transactions without routing them through U.S.-linked banks.
Foreign companies issue more debt outside dollar markets.
Investment funds decide they need somewhat less exposure to U.S. assets.
None of these developments would end dollar dominance alone.
Together, however, they could slowly reduce the structural demand for dollars.
There is already some diversification taking place.
The dollar accounted for more than 70% of disclosed foreign-exchange reserves around the beginning of this century. Today it is roughly 57%.
That decline has not primarily produced a dramatic rise in one rival currency. Instead, reserves have spread across several currencies.
That may offer the most realistic clue about what comes next.
The future might not belong to a new dollar. It could belong to a more fragmented system.
The euro is the most obvious conventional alternative.
It is already the second-largest reserve currency, backed by a large economic bloc with sophisticated financial institutions.
Its international role has also been growing modestly. The European Central Bank reported this year that the euro accounts for roughly 20% across several measures of international currency use.
But Europe has a structural disadvantage.
There is no single European equivalent of the U.S. Treasury market.
Investors buying U.S. government debt are purchasing securities ultimately backed by one federal government.
Europe instead contains German debt, French debt, Italian debt and others, with different fiscal positions and risk profiles.
Greater European fiscal integration and a much larger supply of common European debt could strengthen the euro considerably as a global alternative.
But that would require major political as well as financial changes inside Europe.
China is the world’s second-largest economy and one of the world’s largest trading nations, so the renminbi naturally appears in nearly every discussion about replacing the dollar.
Its use is growing in some areas.
The renminbi was involved in about 8.5% of foreign-exchange transactions in the BIS’s 2025 survey, up from previous years.
But its share of global reserves remains only about 2%.
Why such a large gap between China’s economic importance and its currency’s international role?
Part of the answer is financial openness.
China maintains significantly greater controls over the movement of capital than the United States does.
For a currency to become the world's dominant store of wealth, investors generally need confidence that they can move very large amounts of money into and out of the country, convert the currency freely and rely on predictable legal protections.
Beijing faces a difficult trade-off.
Allowing the renminbi to become a truly global reserve currency would require greater financial openness.
But greater financial openness would also mean surrendering some of the control the Chinese government currently exercises over its financial system.
Dollar dominance therefore cannot be replaced simply by the size of the Chinese economy.
Central banks have been buying substantial amounts of gold.
At current market prices, gold’s share of official reserves has risen dramatically. The ECB estimates that at the end of 2025 gold represented around 27% of total official foreign reserves, even exceeding the share represented by U.S. Treasuries.
But there is an important caveat.
Much of that increase came because the price of gold surged rather than because central banks suddenly replaced enormous quantities of dollar assets with bullion.
And gold has limitations.
It produces no interest. It costs money to store securely. Its price can be volatile. Most importantly, it cannot easily support the enormous credit and banking system required by a modern global economy.
Gold can be an excellent reserve asset. It is much harder for gold to be the operating system of international finance.
This may be the most important part of the entire debate.
The dollar does not necessarily have to be replaced by something else in order to become less dominant.
The world could instead move from one overwhelmingly central currency toward several important ones.
Central banks could hold more euros, yen, pounds, Canadian and Australian dollars, renminbi and gold.
Regional trade could increasingly use regional currencies.
New payment technologies could connect those currencies more efficiently.
And some international transactions could bypass the traditional correspondent-banking system altogether.
Ironically, even the rise of digital currencies does not automatically weaken the dollar.
Many of the world's largest stablecoins are themselves denominated in dollars. Greater use of dollar-backed stablecoins in emerging markets could actually extend dollar usage into parts of the global economy where access to traditional U.S. banking is limited.
The technology may change while the currency underneath it remains the same.
We got a small demonstration of this relationship just this week.
Speaking at the Federal Reserve’s annual conference in Jackson Hole on Friday, Fed Chair Kevin Warsh gave his clearest indication yet that the central bank could raise interest rates again if inflation does not convincingly return toward its 2% target.
Markets reacted almost immediately.
Expectations for a quarter-point rate increase at the Fed’s September meeting jumped sharply. Short-term Treasury yields rose. And the U.S. dollar strengthened against other major currencies.
Why would the possibility of higher American interest rates strengthen the dollar?
Because higher interest rates can make dollar-denominated assets more attractive.
If an investor can earn a higher return holding U.S. Treasury securities or other American assets, demand for those assets, and therefore for dollars to purchase them, can increase.
This is an important distinction.
Higher interest rates can support the value of the dollar in the short term while simultaneously making America’s enormous debt burden more expensive to finance.
That tension matters enormously for the United States today.
Washington benefits from strong global demand for dollar assets. But with federal debt already extraordinarily high, it is also increasingly vulnerable to the cost of maintaining attractive returns on that debt.
And that brings us to the part of dollar dominance that directly affects American taxpayers.
Here the discussion stops being abstract.
The United States government runs persistent budget deficits.
To finance them, the Treasury sells debt.
Foreign investors remain important buyers of American securities. As recently as June 2026, foreign investors made $207.1 billion in net purchases of long-term U.S. securities in a single month, according to Treasury data.
Global demand for dollar assets therefore helps create demand for Treasury securities.
Strong demand generally means the U.S. government can borrow at lower interest rates than it otherwise could.
If the world needed substantially fewer dollar assets, that advantage could diminish.
Foreign central banks and investors would not necessarily dump Treasuries.
They might simply buy fewer of the new ones Washington needs to issue.
To attract buyers, Treasury yields could have to rise.
And that is where the mathematics become uncomfortable.
The Congressional Budget Office projects that debt held by the American public will equal roughly 101% of GDP in 2026, rising to 120% by 2036 under current law.
Net federal interest costs are already projected to exceed $1 trillion in 2026 and reach about $2.1 trillion in 2036.
A country carrying that much debt becomes increasingly sensitive to borrowing costs.
A modest increase in the interest rate investors demand may look small in percentage terms.
Applied across tens of trillions of dollars of federal debt over time, it becomes very large.
Treasury securities help establish the benchmark interest rates used throughout the American economy.
If investors demanded permanently higher yields from the U.S. government, borrowing costs elsewhere could rise as well:
Mortgages.
Business loans.
Auto loans.
Corporate bonds.
State and local government borrowing.
The relationship would not be automatic or identical across every market, and the Federal Reserve would still influence interest rates through monetary policy.
But losing some of the structural demand for U.S. assets would make financing more expensive than it otherwise would have been.
In other words, dollar dominance is not an abstract trophy Washington keeps on a shelf. It quietly affects the price of money.
A significant decline in global demand for dollars would also likely weaken the dollar’s exchange rate, all else equal.
That comes with winners and losers.
A weaker dollar makes U.S.-produced goods cheaper for foreign buyers, potentially helping American exporters.
But it also makes foreign goods more expensive for Americans.
Imported electronics, machinery, clothing, pharmaceuticals, food and raw materials could cost more.
Foreign vacations become more expensive.
Companies relying on imported components face higher production costs.
Some of those costs eventually reach consumers.
That does not mean the loss of dollar dominance would automatically create hyperinflation.
It would not.
But a structurally weaker dollar could produce additional inflationary pressure, particularly in an economy heavily integrated into global supply chains.
Americans would effectively lose some of the purchasing-power advantage that comes from living in the country whose currency everyone else wants.
And we have not even added tariffs to this equation. A weaker dollar would already make imports more expensive. Tariffs imposed on many of those same imports could push costs higher still; a potentially painful combination for American households and businesses reliant on foreign goods, components and raw materials.
This is where financial literacy becomes geopolitical literacy.
America's global military and diplomatic reach costs money.
Aircraft carriers, overseas bases, intelligence operations, weapons development, foreign aid, sanctions enforcement and emergency interventions all ultimately depend on the government's capacity to finance itself.
The United States currently combines enormous geopolitical commitments with persistent fiscal deficits.
Dollar dominance makes that combination easier to sustain.
It also gives Washington another form of power: control over access to key parts of the global financial system.
Because so much international finance involves dollars or U.S.-linked institutions, American sanctions can reach far beyond America's borders.
Banks and corporations outside the United States often comply with U.S. sanctions because losing access to dollar clearing or American financial markets can be enormously costly.
If more international commerce moved outside the dollar system, that leverage would weaken.
Sanctions would not disappear.
But countries would have more alternatives.
The financial infrastructure of American power would become less universal.
In fact, the latest evidence shows remarkable resilience.
The dollar still represents about 57% of foreign-exchange reserves.
It is still involved in roughly nine out of every ten foreign-exchange trades.
International dollar usage remains far larger than America's share of either global GDP or global trade.
And there is currently no rival offering all of the things the dollar offers simultaneously: scale, liquidity, financial openness, deep capital markets and an enormous supply of assets investors broadly regard as safe.
That is why predictions of an imminent end to the dollar era have repeatedly been wrong.
But the opposite conclusion, that dollar dominance therefore cannot weaken, would also be a mistake.
Reserve currencies are ultimately built on confidence.
Confidence in economic management.
Confidence in institutions.
Confidence in the rule of law.
Confidence that government debt will remain credible.
Confidence that investors will be able to move their money.
And confidence that the country issuing the currency will remain politically and economically stable enough to support the system around it.
Those advantages can endure for decades.
They can also be gradually spent.
The most realistic danger to the dollar is probably not another country suddenly defeating it.
It is the United States making the dollar incrementally less attractive while alternatives become incrementally more usable.
A little more fiscal risk.
A little more political uncertainty.
A little more fragmentation in global trade.
A little more reserve diversification.
A few more payment systems outside traditional dollar channels.
A few more transactions settled in other currencies.
Nothing dramatic happens on any particular Tuesday.
But twenty years later, the system looks different.
And for Americans, that difference would matter.
The privilege of issuing the world's dominant currency has helped the United States borrow cheaply, purchase imports with extraordinary ease and finance a level of global power unmatched by any other country.
Losing that privilege would not make the dollar worthless. It would make the United States more like everyone else.
And for a country that has built much of its economic and geopolitical architecture around being anything but, that could be the more consequential change.
Next Saturday in the Financial & Geopolitical Literacy Series: Who will control the money of the future?
We’ll explore the emerging digital monetary system: from cryptocurrencies and stablecoins to commercial-bank tokens and central bank digital currencies; how they differ, who issues and controls them, and what could happen as these once-separate systems increasingly begin to connect.
Missed last week's article? Read it here: How America Went From Paying Down Its Debt to $40 Trillion
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