How to dismantle a reserve currency
The Trump administration could redefine the world’s relationship with the dollar
Few national monies have what it takes to reach international reserve currency status. Markets are picky, only elevating currencies with stable values and issued by states with broad international transactional networks and large, open financial markets. The role of politics in shaping the global currency hierarchy is seen as secondary to these baseline economic fundamentals. That is changing as the second Donald Trump administration has thrust politics to the fore of a renewed discussion about the dollar’s reserve currency status. In the great global currency debate, market forces have never been more passé and political forces have never been so prominent. As the Trump administration’s foreign policy upends the liberal international order (LIO) upon which dollar dominance is built, questions are being raised about the future of the dollar and the potential for change in the international currency system—and rightly so. As realist scholar Robert Gilpin argued, “Every international monetary regime rests on a particular political order.” With the survival of the LIO now in question, Gilpin’s thesis is being tested in real time. Dollar dominance is as much a political phenomenon as a market-driven one. It reflects a set of ideas about what it means to be the reserve currency issuer, as well as a series of policy choices that enabled and fostered the dollar’s international use. If ideas and policy choices change, the status quo monetary equilibrium will destabilize. Today, the Trump White House appears to be breaking from the long-standing postwar view that the dollar’s reserve currency status is in the US interest. This position shift reflects a contrarian perspective that blames the dollar’s reserve role for large US trade deficits and industrial decline. Consequently, the administration is embracing an unorthodox economic policy path to undo these alleged harms. As uncertainty about the United States’ political commitment to the dollar’s reserve role grows under this administration, the currency’s appeal will diminish.
International security dynamics are also stoking change. US allies are incentivized to hold dollars due to security considerations. Moreover, so long as they depend on Washington for protection, their own currencies are less likely to emerge as rivals to the dollar. Trump views US allies as free riders who have taken advantage of the United States by enjoying military protection without paying for it, leading him to openly question the NATO Alliance. If the United States casts aside its security responsibilities in Europe and elsewhere, former military dependencies will pursue self-help security strategies. A more independent Europe that finances a large and fast-growing military budget through joint debt issuances could put the euro on a path toward being the dollar’s rival, which some predicted it could become a quarter century ago.
The dollar’s rise, enshrinement, and reign as the world’s indispensable currency coincided with an unprecedented era of global economic integration and international institution building. As US power has waned in the twenty-first century, its currency power has remained steady. Indeed, dollar dominance might be the most durable feature of the aging US-led postwar international order. Predicting its demise has been a foolhardy enterprise for more than half a century. This time could be no different, but there are reasons to think it might be. For all the economic tumult that the dollar has faced and endured over the last eighty years, its political foundations have remained steadfast—until now. As the political order on which the dollar system rests grows creaky, dollar preeminence is also looking wobbly.
The reserve currency role as policy choice
Political economist Jeffry A. Frieden’s opus Global Capitalism, a sweeping historical account of economic globalization in the twentieth century, presents us with a seven-word thesis: “Globalization is . . . a choice, not a fact.” Frieden’s pithy point is that global markets do not develop in a political vacuum; rather, they are the product of politics, of government policy choices that remove barriers to economic integration. The political base upon which markets are built is easy to ignore, especially during times of openness and cooperation. However, when things begin to fall apart, the weight of politics and policy becomes impossible to miss.
Extending Frieden’s thesis, it is also true that issuing the world’s reserve currency is a choice, not a fact. US economist Peter B. Kenen wrote more than fifty years ago that the United States“allowed other countries to attach [reserve currency] status to the dollar.” That is, US policy choices enabled market actors to elevate the dollar to its global currency status.
Decades of US political leadership supported the dollar’s reserve currency role largely for one reason—it was believed to be in the US national interest. Because the world’s investors want to hold dollars, the US government, as well as US businesses, can tap global capital markets for a seemingly limitless supply of low-cost financing. To overly simplify it, being the reserve currency issuer is akin to having a credit card with an unusually high borrowing limit and the lowest interest rates available. This gives the United States unparalleled macroeconomic flexibility, allowing Washington to keep taxes low while spending more freely on priorities like national defense than it could if its currency were not so special. This is why, in the late 1960s, France’s finance minister infamously labeled the dollar’s reserve status an “exorbitant privilege”; it uniquely allowed the United States to practice fiscal profligacy without being disciplined by markets.
Given the perceived benefits of issuing the world’s reserve currency, preserving dollar preeminence has been a mainstay of presidential administrations going back decades. The proof is in the policy. For example, successive administrations have espoused the United States’ commitment to a “strong dollar,” aimed at ensuring that dollar assets maintain their long-term appeal to foreign investors. Since fully deregulating its capital markets after the Bretton Woods system collapsed, the United States has maintained an open-door investment policy, making it an attractive destination for foreign capital. As a borrower, the US government has earned a sterling reputation by never defaulting on its bonds, which is a central reason why US Treasuries are viewed as safe assets. During the most extreme moments of global financial distress, the Federal Reserve has repeatedly acted as the lender of last resort to the global economy, making its currency available to jurisdictions where panic had made dollar funding scarce. The political independence of the Federal Reserve, while occasionally tested by presidents, has been respected and protected, signaling competent, technocratic management of the dollar.
None of this happened by accident. To return to Frieden’s thesis, the United States has chosen, time and again, to take on the role and responsibility of issuing the world’s reserve currency. Now, as the United States’ commitment to the LIO appears to be fading, its commitment to the dollar’s reserve role might also be slipping away.
From privilege to burden
What happens if US policymakers change their minds? How might US policy evolve if Washington no longer views issuing the reserve currency as a net positive for the United States and something worth preserving? We are beginning to get answers to these questions as the Trump administration breaks with decades of dollar policy orthodoxy.
At the heart of this apparent position shift is a contrarian view of the dollar, associated with the ideas of Michael Pettis, which portrays the reserve currency role as a burden rather than a privilege. As the primary provider of the global safe asset, the argument goes, the US financial system absorbs massive amounts of foreign capital each year. As foreign central banks and private investors buy dollars to scoop up safe, highly liquid US Treasury bonds, the dollar’s value increases while corresponding foreign currency values are depressed. As a result of the strong dollar, US-made goods are uncompetitive globally, depressing exports, while foreign goods are inexpensive in US markets, stimulating imports. The net effect is a large and persistent current account trade deficit that harms US producers and shrinks US industrial capacity.
This perspective has gained a foothold within the Trump White House. In a 2023 public hearing with Federal Reserve Chair Jerome Powell, then Senator JD Vance suggested that reserve currency status amounts to “a massive tax on American producers” and linked it to a “hollowed out industrial base.” Stephen Miran, who served as the president’s top economic advisor prior to joining the Federal Reserve Board of Governors earlier this month, published a paper last year detailing policy steps the Trump administration might take to offload some of the reserve currency burden onto other countries.
For Miran, the objective is clear: to rebalance US trade with the world through dollar devaluation and bring down long-term US debt service costs in the process. He meticulously outlines a range of policy paths the administration can take toward these ends, including: the imposition of tariffs to bring trading partners to the table where a coordinated, multilateral dollar devaluation could be negotiated; cutting off allies from US security commitments and from the Federal Reserve’s dollar swap lines unless they agree to exchange their ten-year US Treasury bills for hundred-year bonds; imposing a “user fee” or tax on foreign official holders of US Treasury securities to reduce the inflow of capital into US financial markets; and influencing Federal Reserve policy to assist in weakening the dollar.
Uncertainty and the dollar
Whether the White House chooses to pursue all, some, or none of Miran’s proposals, the discussion itself generates uncertainty about the global dollar’s future. Political scientists Helen Milner and Erik Voeten argue that, even in the absence of fundamental changes to the “building blocks” of the LIO, uncertainty about the stability of those building blocks—including uncertainty about future policy choices—can affect the global economy. If structural uncertainty increases to the point that the equilibrium to which most market actors previously expected to converge is no longer shared, behavior becomes unpredictable.
The Trump administration’s unorthodox position on the dollar is producing uncertainty on multiple fronts. First, there is the apparent end of a US commitment to a strong dollar. If dollar asset holders expect that the currency is in a sustained depreciation, the appeal of US assets will decline relative to alternatives. Second, there is the question of swapping short-term Treasury bills for much less attractive hundred-year bonds, a move that many would consider a technical default on US debt obligations. If the United States can force foreign governments to accept this deal today, it might do so again in the future. This undermines confidence in future bond issuances, making US Treasuries less attractive as a safe asset. Next is the proposal that the United States might deny its partners access to the Fed’s dollar swap lines. This suggestion has already raised anxiety in Europe and, if implemented, would be viewed as an abdication of US monetary leadership. Then there is the suggestion that the United States could impose capital controls to slow financial inflows into US Treasuries. This move would challenge the United States’ fifty-year reputation as the world’s most open financial system and raise questions about its future commitment to liberalism. Finally, the notion that the White House might somehow secure the Federal Reserve’s cooperation in an effort to depreciate the dollar raises questions about the independence of the US central bank, fanning fears about the soundness of US monetary policy and the dollar’s long-term appeal as a store of value. These measures, to say nothing of the use of coercive trade measures or the threat to withdraw US security protections to key allies, have the potential to reshape how the dollar is perceived around the world.
What happens if structural uncertainty about Washington’s global dollar policy increases? We might have witnessed a trial run of this in April amid the unveiling of Trump’s “Liberation Day” tariffs and his unprecedented threats to fire Powell (threats which continue today). Historically, the dollar strengthens and US bond yields fall in times of crisis and uncertainty, as investors rush for the safety of US Treasuries. This is precisely what happened during the initial weeks of the global financial crisis in 2008, as global investors clambered out of risk assets, such as equities and emerging market assets, and into the haven of US debt securities. In April 2025, however, investors sold their riskier US equities as well as their “safe” US government bonds. Rather than the dollar appreciating and government bond yields falling after Trump’s announcement, the dollar slumped and US borrowing costs jumped, shocking markets. Amid swelling uncertainty about the United States’ political commitment to the global dollar and to liberal economic principles, the old currency equilibrium might be approaching its critical point. Uncertainty about US security commitments is also contributing to this instability.
Security and securities
Collective security is a core component of the LIO, with NATO functioning as its cornerstone. The transatlantic Alliance rests on the bedrock principle that an attack on one member is an attack on all, yet Trump’s transactional approach to foreign policy is straining the credibility of Article 5. Today, US allies in Europe and beyond question whether they can count on Washington to guarantee their security in a future crisis.
While the connection might not appear obvious at first glance, a breakdown in trust within the US alliance network could further weaken the dollar’s reserve currency status. Foreign governments that rely on the United States for security tend to hold a higher share of their foreign exchange assets in US dollars. Investments in US government debt subsidize Washington’s ability to pursue an assertive military posture in the world, including providing defense guarantees for its allies. Thus, security dependencies are incentivized to buy Treasuries that finance the US defense capabilities on which they rely. Were Washington to pull back from its defense commitments abroad, the security-driven logic for holding dollars would fade, cutting into demand for dollar assets.
More importantly, as Trump has sown uncertainty about the United States’ commitment to NATO, Europe is now planning for a future in which its security will not depend on the United States. If Europe embraces a unified approach to security-driven fiscal expansion, the euro stands to expand its share of global reserves at the US dollar’s expense.
TINA meets the euro
Hyping the euro’s potential is as old as the euro itself. Upon its introduction at the turn of the century, some observers envisioned the new monetary unit emerging as the dollar’s equal, if not its rival. Jacques Delors, former European Commission president, proclaimed, “the little euro will become big” while former Federal Reserve Chair Alan Greenspan speculated that “it is absolutely conceivable that the euro will replace the dollar as [the] reserve currency.” Though the currency has ensconced itself as the clear number-two international currency, it is a distant second, accounting for 20 percent of global reserves to the dollar’s 57 percent.
The euro’s stunted rise has reinforced the popular view that dollar dominance is destined to endure indefinitely. Even as dissatisfaction with dollar dominance has climbed because of rising US debt levels and Washington’s reliance on financial sanctions, skeptical observers cry “TINA!” (there is no alternative). This argument accepts that the dollar system is flawed but asserts that it remains the cleanest dirty shirt in the laundry bin. The euro cannot supplant the dollar’s reserve role because the sovereign bond market in Europe is too small and too fragmented. Also, China’s authoritarian political system, closed capital account, and non-convertible currency disqualify the renminbi as an option.
These are not unfair characterizations. On size alone, Europe’s $10-trillion government bond market cannot absorb as much of the world’s savings as the $25-trillion US Treasury market. Furthermore, because the currency union lacks an attendant fiscal union, European governments issue debt separately. With the European debt crisis of fifteen years ago still fresh in market memory, investors rightly view German debt differently than debt issued by other Eurozone nations. In short, European sovereign bonds are of varying quality and are available in too limited a quantity to be a viable alternative to their dollar-denominated counterpart.
Despite these legitimate constraints, the Trump administration’s upending of the United States’ traditional security role in Europe is giving the euro renewed potential as a reserve currency. The European Commission is now calling for the continent to have a self-sufficient defense posture by the beginning of the next decade. To achieve this, the commission acknowledges, “a massive increase in European defence spending is needed,” targeting €800 billion ($930 billion) in newly mobilized financial resources. While not all of this will necessarily be financed through new debt issuances, much of it will. Germany’s surprising elimination of its debt brake—a self-imposed rule that previously limited Berlin’s capacity to deficit spend—is indicative of the change that is already happening.
The issuance of many new sovereign bonds in Europe over the rest of this decade will prove attractive to central banks looking to diversify away from their US Treasury holdings. Importantly, Europe has space for significant and sustained fiscal expansion; in 2024, the European Union’s collective debt-to-GDP (gross domestic product) ratio was 81 percent compared to 120 percent in the United States. European government bond markets have the capacity to grow more than the US Treasury market over the next ten years, increasing the supply of highly rated euro-denominated bonds in primary and secondary markets. There is also reason for optimism on European progress toward unified Eurobond capital markets: the 2025 commission report proposes that €150 billion of the €800 billion total be raised via a newly created financial instrument that would issue single-branded European Union (EU) bonds and EU bills.
Whether these proposals become reality is a political question more than an economic one. The euro’s stunted rise over the last quarter century is attributable primarily to the lack of political will on the continent to implement the policies necessary for the common currency to reach its full international potential. With an aggressive Russia waging a hot war on its eastern flank and a US president aiming to end what he sees as European free riding on US defense, there has never been a moment riper for the Eurozone to take the steps needed to unleash the euro and take down TINA.
What the future holds
We are less than a year into the second Trump administration. Much is yet to be written, and much can still change. In time, the White House might drop its contrarian view of the reserve currency role as a burden and embrace policies that reinforce dollar centrality. Europe might fail to achieve fiscal unity and expansion, leaving its borders less secure from invasion and its currency’s potential arrested once again. However, if we continue along the current path, the erosion of dollar dominance will pick up speed. Change will come in increments, not overnight, but one day—perhaps within the next decade—the dollar’s share of worldwide reserves will fall below 50 percent. This share will continue to slide, not undoing the dollar’s international role but ending its unquestioned unipolar moment. US global financial power and influence will fall in kind.
History is littered with failed predictions of the international dollar’s imminent demise. The are many reasons why the dollar has endured despite its critics. It has unique infrastructural advantages including its dense, efficient, low-cost, cross-border payment network and the world’s deepest, most liquid, and most open financial markets. It also has incumbency advantage. International currency markets are prone to inertia because of network effects. The benefits any actor derives from using any given currency are directly related to whether others are also using that currency. Once the market settles on a choice (in this case, the dollar) actors have little incentive to change. The dollar has also lacked a true peer competitor in the marketplace. While TINA might not be a strong positive argument for dollar dominance, it remains a powerful, constraining, and stabilizing force. These are all good reasons to bet on the status quo continuing.
Yet it is also true that dollar dominance will not last forever. Eventually, the doomsayers will get it right. As Charles Kindleberger once quipped, “the dollar will end up on history’s ash heap.” Kindleberger was an economist, but one with a keen eye for the fundamental role that politics plays in the world economy. He would have been sympathetic to Gilpin’s observation that monetary regimes and political orders are co-constituted. Dollar dominance and the US-led LIO were constructed alongside one another by a series of mutually reinforcing policy choices. Whether the former can long endure without the latter is the monetary question of our age.
About the author
Daniel McDowell is the Maxwell Advisory Board professor of international affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University and a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center.
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