Economic data confirm the dollar’s continued dominance, and there are good reasons to expect it to persist.
We are currently in the midst of broad-based speculation that the U.S. dollar’s role at the center of the international economic system is under threat. These fears have been catalyzed both by sentiment, including Russia’s and China’s stated desire to avoid the long arm of U.S. sanctions, and concrete actions like the agreement between Brazil and China to invoice and settle bilateral trade in Chinese yuan. However, a close examination of long-term economic data reveals that the dollar’s international status remains unchallenged despite the ongoing de-dollarization hysteria.
Dollar pessimists often point to the fall in the dollar’s share of global reserves from approximately 70 percent in 2000 to approximately 60 percent today. However, such estimates likely understate the dollar’s true share, as significant portions of non-dollar holdings are hedged back into dollars via derivatives contracts. Additionally, alarmist warnings regarding a collapse of the dollar’s market share are often misleading because the market value of dollar assets fell significantly more than that of other substitutes in 2022 as a result of the Fed’s interest-rate hikes. On a longer time horizon, the dollar’s share of international reserves remains firmly in the middle of the post–World War II range and is up from the 50-year low of 50 percent reached in 1990.
Foreign-exchange transaction volume tells an even more powerful story of dollar stability. According to the Bank of International Settlements (BIS), as of 2022, nearly 90 percent of all over-the-counter foreign-exchange transactions still involve the dollar as one of the transaction’s currency pairs, which has actually increased in the last decade. It is of course possible that rumored moves, like Russia’s use of the Chinese yuan, could emerge in the data moving forward. But such talk has been a constant feature of the international economy for decades, and the moves have never materialized. The depth and connectedness of the dollar-invoicing ecosystem means that it is not so easily displaced.
The dollar is still by far the global choice for debt issuance for both private firms and governments. Approximately 45 percent of global debt securities are denominated in the dollar, which is at the high end of the 40–45 percent range that has prevailed in the last decade. Emerging markets are often viewed as a key battleground in the strategic competition between China and the United States, with widespread speculation that China will leverage increasing economic ties to the detriment of the United States. While China has attempted to internationalize the yuan in the recent decade through lending globally, the majority of syndicated loans are still denominated in U.S. dollars, according to research by international economists Matteo Maggiori, Brent Neiman, and Jesse Schreger.
The dollar’s resilience should come as a surprise to no one, as it reflects economic realities. Which currency dominates the international monetary system is not an absolute judgment, but a relative one. Despite the significant challenges the United States faces, it still enjoys relative economic and geopolitical primacy. European economic growth, as measured by GDP per capita, appears to have plateaued in the past decade as the continent struggles with demographic constraints and a smothering regulatory state. Historically, investors might have overlooked the absence of the rule of law in China, but as Chinese growth slows and the regime tightens its grip, it is experiencing dramatic capital flight.
International usage of the dollar is the result of an equilibrium of costs and benefits both for international participants and for all Americans, including those below the median income. The U.S. derives some important national-security advantages, such as the ability to impose sanctions, and economic benefits like increased asset prices, lower borrowing costs, and additional fiscal space for government investments.
Yet the dollar system also imposes important costs for Americans across the income-distribution range, including long-term budget challenges for individuals and governments as a result of incentives to borrow, and difficulty competing in tradeable goods, particularly in the manufacturing sector. International accumulation of dollar assets mechanically results in decreased U.S. output as a result of transmission through the currency channel as the dollar strengthens. On the other side of the equation is increased international economic output. These costs to Americans are benefits to foreign governments.
The dollar’s international role therefore provides not only relative stability and predictability, but also competitive advantages for foreign economies. To give up the dollar, other countries would also need to give up the domestic output they produce as a result of the United States exporting demand, which would slow many countries’ export-driven growth models. With growth flagging outside the United States, surrendering output is likely to be unpalatable.
Despite the constant international complaints over the United States’ “exorbitant privilege,” economic incentives ultimately guide economic behavior. Absent a fundamental restructuring of the international economy, economic data should continue to reflect stability in the dollar system.
Dan Katz is a co-founder of Amberwave Partners, an asset-management firm, and served as a senior adviser at the U.S. Treasury, 2019–2021. Jon Hartley is a Ph.D. student in economics at Stanford University, a senior fellow at the Macdonald-Laurier Institute, and a research fellow at the Foundation for Research on Equal Opportunity.
