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Since the close of the Second World War, the US dollar has been the fulcrum of the international financial system. It anchors commodities markets, undergirds central bank reserves, facilitates global trade and remains the preferred currency for cross-border investment. Yet, amid tectonic shifts in geopolitics, digital innovation and domestic instability in the US itself, the contours of a new monetary order are beginning to emerge — one that could eventually eclipse the greenback’s singular dominance.

The dollar’s position remains formidable, but no longer unassailable. It still accounts for nearly 59 percent of global foreign exchange reserves, according to International Monetary Fund data, and features in close to 90 percent of foreign exchange transactions. But the trend line is downward: in 1999, the dollar represented 71 percent of central bank reserves. More recently, data from the IMF’s COFER survey shows a steady uptick in holdings of nontraditional currencies — from 6 percent in 2007 to nearly 10 percent in 2023 — including the Chinese renminbi, Canadian dollar and Korean won.

This gradual shift is being driven not only by market dynamics, but also by politics. The strategic use of the dollar as a tool of foreign policy — via sanctions, SWIFT exclusions and asset freezes — has created incentives for major economies to explore alternatives. The freezing of more than $300 billion of Russia’s central bank reserves in 2022 made explicit what many had long suspected: dollar dependency entails geopolitical risk. China, India, Brazil and others have since accelerated efforts to settle bilateral trade in their own currencies and deepen nondollar payment infrastructure.

And yet, no clear successor has emerged. The euro, while accounting for about 20 percent of global reserves, continues to be constrained by the eurozone’s institutional fragmentation and lack of fiscal union. The renminbi, although bolstered by Beijing’s trading heft and the People’s Bank of China’s growing footprint, remains tightly managed and capital-controlled — conditions anathema to reserve currency status. Other currencies such as the yen, franc or sterling are liquid but lack scale. Cryptocurrencies, meanwhile, have proven to be more speculative asset than reliable store of value.

More serious long-term challengers may emerge in the form of central bank digital currencies. China’s e-CNY is the most advanced pilot among major economies, already tested in 25 cities and used in transactions exceeding 100 billion yuan. Cross-border central bank digital currency trials are underway with other Asian and Gulf states. The objective is clear: to build a credible, scalable mechanism for trade settlement outside the dollarized system — particularly for energy, metals and strategic goods.

The strategic use of the dollar as a tool of foreign policy has created incentives for major economies to explore alternatives. 

Dr. John Sfakianakis

Still, the core criteria that underpin reserve status — deep, open capital markets; legal predictability; political stability; and a credible central bank — remain unmatched in the US. However, even these foundations are showing signs of strain. US federal debt now exceeds $36 trillion, with debt servicing costs projected to rise above defense spending by the end of the decade. Foreign ownership of US Treasurys has declined as a share of total debt and China’s holdings have fallen below $775 billion, down from a peak of $1.3 trillion in 2013.

Crucially, the evolving political climate in the US has introduced a new layer of institutional uncertainty. Increasingly, fiscal brinkmanship, unpredictable shifts in foreign and trade policy, and overt challenges to the independence of key institutions have begun to weigh on international perceptions. Allies have grown more circumspect; adversaries more assertive. The prospect of renewed political volatility in Washington — marked by a less predictable approach to global engagement — risks eroding long-held assumptions about the stability and stewardship of the US-led financial order.

At the same time, Europe — often seen as the most viable democratic counterweight — faces its own constraints. The euro, while the second-most held reserve currency, remains hemmed in by the structural limitations of the EU project: a monetary union without full fiscal integration, fragmented sovereign debt markets and diverging economic trajectories between core and peripheral members. Germany’s fiscal conservatism, France’s political volatility and Italy’s chronic debt overhang continue to test the eurozone’s cohesion. Without deeper institutional convergence and greater political will, it is difficult to envisage the euro evolving from a regional reserve currency into a true global alternative.

History offers precedent. In the early 20th century, sterling held sway over global finance, backed by the vast reach of the British Empire and the primacy of the City of London. But post-1945, the UK’s shrinking industrial base, rising debt and imperial retreat catalyzed a prolonged loss of confidence. Sterling’s share of reserves declined gradually — from over 40 percent in the 1940s to under 5 percent by the 1980s. The transition was not sudden but terminal.

Other contenders have emerged over the decades but failed to displace the dollar’s supremacy. The Deutsche mark gained traction in the 1980s as West Germany’s economic and monetary orthodoxy attracted foreign capital. The Japanese yen appeared poised to ascend in the early 1990s on the back of Japan’s export dominance, but its rise was undercut by demographic stagnation, banking crises and policy deflation.

The Swiss franc, while highly stable and liquid, remains limited by the modest size of Switzerland’s economy and capital markets. Each case illustrates a critical truth: global currency status is not simply a function of economic strength, but of systemic openness, institutional scale and geopolitical alignment.

The US dollar is not poised for imminent collapse, nor is a single currency waiting in the wings to usurp it. But the emergence of a multipolar currency world is increasingly plausible — one in which the dollar still leads but coexists with regional reserve currencies and digital platforms with partial global reach. This evolution would bring more exchange rate volatility, transactional complexity and geopolitical arbitrage to the international system.

The dollar’s centrality has long been underwritten by more than economics: it has been embedded in the architecture of the American-led global order. As that order fragments, so too will the financial structures that support it. For governments, investors and corporates alike, this does not mean abandoning the dollar — but it does mean preparing for a future in which its dominance is no longer a given.

• Dr. John Sfakianakis is Chief Economist at the Gulf Research Center and Chief Global Strategist at the Paratus Group.