Major Threats to the US Dollar as the Reserve Currency in the Next Five Years
Executive Summary
The US dollar has held the position of the world’s dominant reserve currency for decades, a status that provides the United States with considerable economic and geopolitical advantages. However, the next five years present a complex landscape of emerging threats that could challenge this long-standing dominance. This report analyzes these potential threats, encompassing the rise of alternative national currencies, the advent of central bank digital currencies (CBDCs), the increasing role of cryptocurrencies and stablecoins, significant geopolitical trends, and the influence of US domestic economic factors. While the dollar’s position remains strong due to the size and stability of the US economy and the depth of its financial markets, a confluence of factors suggests a gradual erosion of its unchallenged status. The most significant threats in the near term include unsustainable levels of US government debt, persistent inflation, and the increasing momentum of de-dollarization initiatives driven by geopolitical tensions and the expansion of economic alliances like BRICS. While a sudden dethroning of the dollar is unlikely, these converging forces necessitate a careful evaluation of the evolving international monetary system.
Introduction: The Enduring Role and Evolving Challenges of the US Dollar
Since the end of World War II, the US dollar has occupied a uniquely dominant position in the global financial system. Its role as the preferred currency for central bank reserve assets, international trade, and financial transactions has provided the United States with significant advantages. This "exorbitant privilege" has manifested in lower borrowing costs for the US government and American consumers , an increased capacity to borrow , and a reduced risk of facing a currency crisis. Furthermore, the widespread use of the dollar has enhanced America’s ability to leverage financial sanctions as a tool in its diplomacy efforts.
However, this reserve currency status also carries disadvantages for the US economy. The US must often run trade deficits to supply the world with dollars, as the benefits of reserve currency status are intrinsically linked to a trade imbalance. This can lead to increased American indebtedness and put upward pressure on the dollar’s exchange rate, potentially making US exports less competitive. Moreover, the global financial system becomes more susceptible to US financial conditions.
In recent times, the dollar’s dominant position has faced increasing scrutiny due to a confluence of factors. Rising geopolitical fragmentation and conflicts over international trade and finance have led some nations to seek alternatives to the dollar. The rapid growth of other economies, particularly China, and advancements in financial technology, including digital currencies, are also contributing to this evolving landscape. This report will delve into these challenges, analyzing the major threats to the US dollar’s reserve currency status in the next five years.
The Current Status of the US Dollar as the Global Reserve Currency
Despite growing speculation about its future, the US dollar remains the world’s preeminent reserve currency. As of the fourth quarter of 2024, the US dollar accounted for 57.80 percent of global foreign exchange reserves, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data. While this represents a gradual decline from over 70 percent in 2000 , the dollar’s share still significantly exceeds that of any other currency, with the euro trailing at around 20 percent. This indicates the dollar’s continued, albeit slightly diminished, dominance in central bank reserve holdings.
Beyond its role as a reserve asset, the US dollar remains the primary currency for international trade invoicing and financial transactions. Data from the Bank for International Settlements (BIS) reveals that the dollar is involved in approximately 88.5 percent of all global foreign exchange transactions , highlighting its central role in currency markets. Furthermore, the dollar is used in around 54 percent of foreign trade invoices globally , underscoring its importance as a medium of exchange in international commerce. This transactional dominance remains largely unchallenged.
Several factors continue to support the US dollar’s leading position. The United States boasts the world’s largest and most dynamic economy, accounting for roughly 26 percent of global GDP. This economic strength, coupled with the depth and liquidity of US capital markets , provides a stable and reliable environment for investors. The US also has a strong track record of investor protections and the rule of law, fostering confidence in the dollar as an effective store of value and a safe haven during times of economic and geopolitical turmoil. Moreover, the US Federal Reserve plays a crucial role in maintaining global financial stability by extending swap lines to foreign central banks, providing them with dollar liquidity during periods of severe financial stress.
The Potential Rise of Alternative National Currencies
While the US dollar remains dominant, the potential for other national currencies to gain prominence in international trade and finance warrants careful consideration.
The euro, since its introduction, has been the second most important currency in the international monetary system. It currently accounts for around 20 percent of global foreign exchange reserves. The euro benefits from the Eurozone’s large economic base, which is comparable to that of the United States, and the political stability within the Eurozone. However, the euro is hampered by the lack of a single sovereign fiscal authority, the economic heterogeneity among its member states, and the fragmented nature of European financial markets. Despite these limitations, the European Central Bank (ECB) has increasingly sought to promote the euro’s global role in recent years, viewing it as essential to the EU’s economic and political power.
The Chinese Yuan (Renminbi) has also seen increasing internationalization, acknowledged by its inclusion in the IMF’s Special Drawing Rights (SDR) basket. China’s rapid economic growth and its position as a key driver of global trade provide a strong foundation for its currency. The Chinese government has actively promoted the international use of the RMB through various measures, including establishing offshore clearing banks and the Cross-Border Interbank Payment System (CIPS). However, the RMB’s ascent as a reserve currency is constrained by China’s stringent capital controls, the limited liquidity and openness of its financial markets, and the lack of full convertibility.
While both the euro and the yuan have the potential to see increased usage in international trade and finance in the next five years, neither is likely to supplant the US dollar as the primary reserve currency within this timeframe. The dollar’s entrenched position, supported by its deep and liquid markets and its status as a global safe haven, presents a significant hurdle for any challenger. Furthermore, central banks appear to be diversifying their reserves into non-traditional currencies, such as the Australian and Canadian dollars, at a faster rate than they are increasing their holdings of euros or yuan. This suggests a trend towards broader diversification rather than a direct replacement of the dollar by a single dominant alternative.
The Impact of Central Bank Digital Currencies (CBDCs)
The development of central bank digital currencies (CBDCs) by major economies represents a potentially significant shift in the global financial landscape that could impact the dominance of the US dollar. Globally, there is a high level of interest in CBDCs, with 94 percent of surveyed central banks exploring their potential issuance. Major economies are in various stages of research and development. The United States is currently in the research phase, with no decision yet made on whether to issue a digital dollar. The Eurozone has moved into the preparation phase for a digital euro. China is the most advanced, with its digital yuan (e-CNY) already in the pilot phase across numerous cities.
One of the key potential impacts of CBDCs is their ability to facilitate cross-border payments more efficiently and at a lower cost than traditional systems. CBDCs could potentially bypass existing correspondent banking networks and messaging systems like SWIFT, enabling direct currency exchange between participating countries. This could reduce transaction times and fees, making international trade and remittances more seamless.
The development of CBDCs also has implications for the demand and dominance of the US dollar. Some experts suggest that the US approach, which currently favors the regulation of dollar-backed stablecoins over the issuance of a US CBDC, is aimed at maintaining the dollar’s prominence in the digital realm. The widespread adoption of dollar-pegged stablecoins could reinforce the dollar’s status as the currency of choice for digital transactions. However, the successful launch and international adoption of CBDCs by other major economies in their own currencies could offer viable alternatives for cross-border payments and potentially reduce the reliance on the US dollar. The interoperability between different CBDC systems will be a crucial factor in determining their impact on the global financial architecture.
The Role of Cryptocurrencies and Stablecoins
Cryptocurrencies, such as Bitcoin, have garnered significant attention for their potential to disrupt traditional finance. They offer the promise of fast and low-cost cross-border transactions, operating outside the control of central authorities. However, their inherent price volatility, scalability challenges, and the evolving regulatory landscape limit their widespread use as a reliable medium of exchange for large-scale international trade and finance.
Stablecoins, particularly those pegged to the US dollar like USDT and USDC, are playing an increasingly significant role in global payments. Their relative price stability compared to other cryptocurrencies makes them more suitable for use in remittances, business-to-business transactions, and as a stable medium within the broader crypto ecosystem. Dollar-pegged stablecoins, in particular, could potentially reinforce the US dollar’s dominance in the digital realm by providing a widely accessible and stable digital form of the currency for international use.
Despite the promise of cryptocurrencies and stablecoins, significant regulatory and adoption hurdles remain before they can pose a substantial challenge to the traditional financial system and the US dollar’s position. Regulatory clarity regarding their issuance and use will be crucial for their broader acceptance and impact.
Geopolitical Trends and De-Dollarization Initiatives
Geopolitical trends and the formation of new economic alliances are increasingly influencing the global financial landscape and posing a potential challenge to the US dollar’s reserve currency status. The expansion of economic blocs like BRICS (Brazil, Russia, India, China, South Africa, with recent additions including Egypt, Ethiopia, Iran, and the UAE) signifies a growing desire among member nations to reduce their reliance on the US dollar. Discussions about creating alternative payment systems, such as BRICS Pay , and the long-term ambition of establishing a new reserve currency backed by member states , reflect a concerted effort to foster greater economic autonomy and potentially shift the global financial order.
Several countries and blocs are actively pursuing de-dollarization initiatives to reduce their dependence on the US dollar in international trade and reserves. This trend is particularly evident among countries like Russia, China, Brazil, India, and nations within ASEAN, driven by a desire to mitigate the impact of US sanctions and gain greater economic sovereignty. These efforts include promoting the use of local currencies in bilateral trade agreements, increasing reserves of gold and other non-dollar assets , and exploring alternative payment systems.
Geopolitical shifts play a significant role in shaping the US dollar’s reserve currency status. The increasing use of the dollar as a tool for foreign policy through sanctions has led some countries to question its reliability. This, combined with the rise of competing economic powers, could gradually erode trust in the dollar and encourage a shift towards alternatives.
US Domestic Economic Factors
US domestic economic factors, particularly government debt levels, inflation rates, and monetary policy decisions, play a critical role in the long-term strength and stability of the US dollar. The US government debt is projected to rise significantly in the coming years , with the debt-to-GDP ratio expected to reach record levels. This unsustainable trajectory of government debt could undermine investor confidence in the dollar’s long-term stability and potentially lead to higher borrowing costs for the US.
The US inflation rate, which stood at around 2.4 percent in March 2025 , and the monetary policy decisions of the Federal Reserve also have a significant impact on the dollar’s global standing. Divergent monetary policies between the US and other major economies can influence the dollar’s strength. The Fed’s potential rate cuts in 2025 could lead to a weakening of the dollar if other central banks maintain higher rates.
Potential policy shifts, such as the imposition of tariffs advocated by the Trump administration , could also significantly impact the dollar. While theoretically tariffs might strengthen the dollar by reducing import demand, recent evidence suggests they could lead to depreciation and fuel inflation due to retaliatory measures and disruptions to global trade.
Shifts in the Global Trade and Financial Landscape
The global trade and financial landscape is witnessing a gradual shift away from the US dollar, with a growing trend of non-dollar denominated trade. This is particularly evident among the BRICS nations and other countries seeking to reduce their dependence on the dollar for bilateral trade, especially in commodities like oil.
This shift away from the dollar is driven by several factors, including geopolitical tensions and the desire for greater economic autonomy. The perceived "weaponization" of the dollar through sanctions has further incentivized countries to seek alternatives. While the US dollar remains dominant in global trade, accounting for a significant share of international payments and trade invoicing , the trend of non-dollar trade is expected to continue and potentially accelerate.
The implications of these trends for the US dollar’s reserve currency status suggest a gradual erosion of dominance rather than a sudden dethroning. The lack of a single, universally accepted alternative and the dollar’s deep-rooted status in global finance make a complete replacement unlikely in the next five years.
Conclusion: Identifying the Most Significant Threats to the US Dollar
Synthesizing the analysis of the various factors, several significant threats to the US dollar’s reserve currency status emerge over the next five years.
Likely Significant Threats:
* US Domestic Economic Factors: The high and rising levels of US government debt and the potential for persistent inflation pose a considerable risk. These factors could erode investor confidence in the long-term stability of the dollar, making it less attractive as a store of value and potentially leading to higher borrowing costs for the US.
* Geopolitical Trends and De-Dollarization Initiatives: The expansion of economic alliances like BRICS, coupled with active de-dollarization efforts by several nations, particularly in response to US sanctions and trade policies, represents a gradual but persistent threat. The increasing use of local currencies in bilateral trade and the exploration of alternative payment systems signal a move away from the dollar-centric global financial order.
* Shifts in Global Trade: The growing trend of non-dollar denominated trade, driven by geopolitical factors, the desire for greater economic autonomy, and the rise of alternative economic powers, will likely continue to chip away at the dollar’s dominance in international commerce.
Less Likely but Potentially High Impact Threats:
* Rapid Adoption of Cryptocurrencies/Stablecoins: While currently facing regulatory uncertainties and adoption challenges, a sudden and widespread shift towards these digital assets for international transactions could disrupt the traditional financial system and significantly impact the dollar’s role.
* Abrupt Loss of Trust: A major geopolitical or economic misstep by the United States could trigger a rapid and significant loss of international confidence in the dollar, leading to a swifter decline in its reserve currency status.
Despite these threats, the US dollar’s continued dominance is supported by several resilience factors. Its established network effects, the depth and liquidity of US financial markets, and the lack of an immediate, universally accepted alternative currency provide significant inertia to its status. While the next five years are likely to see increased challenges to the dollar’s dominance, a complete replacement remains improbable. However, the gradual erosion of its status necessitates careful monitoring and strategic policy responses to safeguard US economic interests in the evolving global financial landscape.
Barbara Iverson