America’s Dollar Faces Own Demise

Economic historian Barry Eichengreen argues that the single greatest threat to the dollar’s global dominance comes not from foreign rivals, but from domestic instability in the United States. In his book Money Beyond Borders: Global Currencies from Croesus to Crypto, the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, suggests that global investors require confidence in the rule of law, separation of powers, and control of corruption. When these domestic political preconditions erode, foreign central banks and commercial firms hesitate to hold dollars, which are the foundation of the global financial system.

Is the Fed’s role as lender of last resort at risk?

Global investors rely on the Federal Reserve to act as a lender of last resort for foreign banks. By extending dollar swap lines, the Fed provides liquidity to central banks outside the United States, ensuring that banks under their jurisdiction can hold dollars without fear of a liquidity crunch. If the Fed focuses narrowly on domestic responsibilities or faces pressure from a nationalistic administration, this safety net could unravel. Eichengreen expresses doubt that a central bank with a smaller balance sheet would continue to provide global dollar liquidity at the same level.

He points to Stephen Miran, a former Trump administration appointee to the Fed Board, who argued that the US should not provide global public goods without recompense. This perspective stands in contrast to the traditional view that dollar dominance requires the US to serve as a reliable steward of international capital. The potential shift toward a more isolationist monetary policy represents a significant structural change that could undermine the dollar’s utility as a safe-haven asset.

The limits of protectionism and the historical record

Eichengreen draws a parallel between the Nixon administration’s 1971 import surcharge and the current administration’s use of tariffs. In both cases, policymakers sought a weaker dollar to boost export competitiveness and address balance-of-payments deficits. The mechanism was similar: the US imposed a 10 percent import surcharge in August 1971 to force a depreciation of the dollar without requiring other countries to devalue their own currencies. Today, similar rhetoric suggests tariffs might induce foreign governments to accept a lower dollar value.

However, Eichengreen notes that this strategy has not worked in the past and is unlikely to work now. The dollar ranks as the tenth most important factor in US competitiveness, far behind productivity growth, investment in worker skills, entrepreneurship, and tax system efficiency. A weaker currency might provide a short-term boost, but it does not address the fundamental drivers of economic strength. In fact, the attempt to manipulate the currency often leads to trade tensions and retaliatory measures that ultimately harm the broader economy.

The euro’s struggle to compete

Despite the creation of the euro in 1999, the currency has gained zero ground on the dollar since 2001. Eichengreen identifies three specific obstacles to euro expansion: the lack of a capital markets union, a shortage of safe euro-denominated assets, and the absence of a common defense and security policy. These factors prevent the currency from achieving the level of liquidity and trust required to challenge the dollar on the global stage.

Current European banking regulations favor national markets over a unified European system. Banks prefer to keep financial regulation within their home countries rather than migrating oversight to Brussels or Paris. Additionally, the availability of safe assets is limited. Only three European governments hold triple-A ratings from all major agencies, representing a fraction of the $30 trillion to $40 trillion in US Treasuries. Without a unified fiscal policy or a common defense strategy, the euro remains a regional currency rather than a global rival.

The Chinese playbook and the political ceiling

China is actively internationalizing the renminbi, building infrastructure like the cross-border interbank payment system and the mBridge platform. The People’s Bank of China has extended more currency swap agreements than the Federal Reserve or the European Central Bank. However, the process is still in its infancy compared to the century-long history of dollar dominance. China accounts for just two percent of global foreign exchange reserves, compared to the US’s nearly 60 percent.

Eichengreen acknowledges that China is following the historical path of the US, starting with trade settlements and moving to financial transactions. Yet, he questions whether the political system can support a truly global currency. The lack of independent central banking, regulatory transparency, and checks and balances in China presents a significant barrier. Until these institutional characteristics are established, the renminbi will struggle to overcome the deep-seated trust that underpins the dollar.

Stablecoins and the future of digital currency

The rise of stablecoins presents a complex challenge to the dollar. While blockchain technology is likely to persist, the units of account running on these rails are uncertain. Eichengreen notes that 99 percent of stablecoins are currently linked to the dollar, which suggests these tokens may simply reinforce dollar dominance rather than threaten it. He is skeptical of privately issued stablecoins, warning that a lack of finality could lead to instability.

The debate over Central Bank Digital Currencies (CBDCs) adds another layer to this dynamic. The European Central Bank and the People’s Bank of China are betting on tokenized commercial bank deposits and CBDCs, while Congress has prohibited the Fed from issuing a CBDC. Eichengreen suggests that tokenized bank deposits, which rely on the existing banking system, might offer greater stability than unregulated private tokens. The outcome will depend on whether the US adopts private innovation or focuses on the regulatory perimeter of its traditional financial institutions.

A fragmented world without the dollar

If the dollar’s dominance were to disappear, the global financial system would likely fracture into competing blocs. A world divided into a dollar area, a euro area, and a renminbi area would require careful design to ensure that these blocs could still transact with one another. Eichengreen warns against the scenario where China and its neighbors exclusively use the renminbi while the US isolates itself economically. The 1930s demonstrated the disastrous consequences of such fragmentation, when economic nationalism led to a collapse in global trade.

To prevent this, policymakers must maintain overlapping monetary systems that allow for cross-border transactions. The challenge lies in balancing the desire for monetary sovereignty with the practical necessity of a connected global economy. As the US political scene shifts, the ability to maintain these connections will depend heavily on the reliability of domestic institutions and the willingness of foreign partners to engage in a shared monetary framework.