What made the dollar the world’s dominant currency?
What has the United States gained from that status for decades?
Why do many countries want to change it now?
These are the questions addressed by Lael Brainard—fellow at Georgetown University’s Psaros Center, senior fellow at Harvard Kennedy School’s Mossavar-Rahmani Center, former Director of the National Economic Council, former Vice Chair of the Federal Reserve, and former U.S. Treasury Undersecretary—through a concise review of economist Kenneth Rogoff’s book, Our Dollar, Your Problem.
According to Brainard, the dollar’s dominance delivers major advantages to the United States: it reduces price volatility in U.S. foreign trade, allows Washington to borrow heavily at low cost, and gives the U.S. government powerful tools to punish adversaries through the financial system. Economic inertia—the built-in resistance of global systems to change—together with the perceived credibility of U.S. political and financial institutions, helps keep the dollar on top.
From here arise the serious risks of U.S. tariff policies and the current administration’s assault on independent financial institutions, especially the Federal Reserve. These choices, Brainard argues, make the dollar less attractive. If such policies persist, they could undermine the currency’s supremacy, which underpins much of America’s domestic and foreign policy power.
Seven Decades at the Summit
For over seventy years, the U.S. dollar has anchored the world economy. Today it is used in roughly 90% of foreign-exchange transactions. The bulk of global trade—including 74% of Asia’s trade and 96% of trade in the Americas—is priced in dollars. The dollar accounts for about 58% of central-bank reserves outside the U.S., and dollar-denominated assets are preferred worldwide to those priced in other currencies.
Dominance brings tangible benefits: smoother trade pricing, ample, cheaper borrowing for Washington, and sanctions leverage for policymakers. As Rogoff argues in Our Dollar, Your Problem, replacing a dominant currency is extraordinarily difficult. The force of inertia keeps the system anchored to the dollar, and U.S. institutions add another layer of stickiness. Many states resent the dollar system, yet none has offered a substitute strong enough to displace its advantages. Still, Rogoff warns the dollar’s supremacy may have peaked, and the U.S. will need careful policy stewardship to preserve its privileged position.
Historically, successive U.S. administrations either reinforced the dollar’s role or at least avoided undermining it—respecting Fed independence and America’s international commitments, including its role as guardian of the global financial order.
By contrast, the current administration is testing the foundations of the dollar’s standing: expanding executive power, pressuring the Fed, questioning the independence of official statistical agencies, and casting doubt on U.S. obligations to allies and partners.
At the same time, Washington is pursuing policies that depend on the dollar’s privilege—such as a massive spending bill signed in July, which is expected to raise U.S. federal debt significantly over the coming decade. If the dollar’s dominance erodes, U.S. borrowing capacity will erode with it, debt-service costs will rise, and a sharper fall in the dollar’s value could bind fiscal choices in ways that inflict lasting economic damage.
Why the Dollar Sits on the Throne
There are practical reasons for the dollar’s primacy. Using it allows countries to trade globally without holding dozens of currencies. Diversifying away from the dollar is costly, requiring multiple currency balances and exposure to their separate risks.
Both U.S. allies and rivals have tested the dollar’s position. As Rogoff notes, none has assembled the full set of attributes needed to replace it. Since the euro’s launch in 1999, the dollar’s share of reserves fell from 71% to 58%, while the euro stabilised around 20%. But without deep, unified and politically supported euro-debt markets that can supply liquidity at scale, the euro cannot credibly supplant the dollar.
Meanwhile, China and Russia have intensified efforts to work around the dollar, especially as Washington and its allies use the dollar-centric payments system to impose sanctions. After Russia’s 2022 invasion of Ukraine, the U.S. and partners restricted Russian banks, capped oil prices, and froze sovereign assets abroad. In response, Beijing is trying to reduce risk exposure—developing alternative payment rails in renminbi (yuan) with partners such as Brazil and India, and pushing for cross-border digital-currency standards, an arena in which Washington is largely absent.
Rogoff counters that renminbi internationalisation will fail without deep reforms. Only by liberalising capital markets, expanding RMB bond markets, and reducing volatility can China give foreign investors confidence that they can liquidate RMB assets when needed.
Privilege—And Its Price
In the 1960s, future French president Valéry Giscard d’Estaing condemned the dollar’s supremacy as an “exorbitant privilege.” Rogoff assesses these benefits and their burdens with balance. Because the U.S. borrows abroad in its own currency, others shoulder exchange-rate risk. Practically, the U.S. enjoys relative insulation from swings in import and export prices. As issuer of the dominant settlement currency, Washington sees cross-border flows clearly and wields potent sanctions tools. It also exerts outsized influence over global financial rules, holding unique veto power at the World Bank and IMF.
Crucially, dollar dominance lets Washington borrow more and pay lower interest than most. Foreign investors accept lower yields in exchange for the Treasuries’ convenience yield—liquidity and safety—allowing the U.S. to finance itself more cheaply. Demand for these safe, liquid assets surges in crises, making Treasuries the core collateral of international finance.
Rogoff highlights estimates that the U.S. government saves at least $140 billion annually on international debt service because of lower rates, and as much as $600 billion if domestic holdings are included.
This is why the dollar’s reputation as a safe asset matters: in the 2008 global financial crisis and the 2020 COVID-19 recession, the United States could borrow massively to cushion firms, workers and households—recovering faster than many others.
Yet there are costs. Historically, the issuer of a dominant currency tends to be a leading military power—and military primacy is expensive. Temporary swap lines that lend dollars to select central banks can also be a burden, though in the rare cases they were used (2008 and early 2020), they stabilised U.S. finance without material cost.
Politically, a strong dollar has often hurt U.S. industry and labour, especially when trading partners manage their currencies. From 2000 to 2005, for instance, China kept the RMB from appreciating even as its exports to the U.S. tripled, with long-term damage to manufacturing employment across America. The losses, however, stemmed less from the dollar’s dominance per se than from China’s industrial and currency policies—and U.S. officials’ failure to counter them effectively.
Cracking the Pillars
Americans, on balance, benefit from preserving the dollar’s decades-long primacy. That requires keeping dollar assets attractive to global investors. Rogoff stresses that this attractiveness rests on the strength of U.S. institutions and norms: Fed independence, the rule of law, and a record of reliable international engagement. These guard against high inflation, protect creditors’ rights, secure capital-market access, and sustain creditworthiness—foundations that have protected the dollar even amid political turbulence and foreign competition.
Prospects for continued dominance therefore depend on the status-quo advantages (and inertia) plus institutional resilience. But Our Dollar, Your Problem closes with the November 2024 U.S. elections and does not engage with second-term steps that may challenge those assumptions.
To start, the administration unilaterally raised tariffs to levels unseen since the 1930 Smoot-Hawley Act, promising “hundreds of billions in annual revenue” to reduce Treasury’s borrowing needs. On average, tariffs jumped to 17% across all countries—around eight times last year’s level—and even close allies such as the United Kingdom, with which the U.S. runs a trade surplus, now face 10% duties.
This sidestepped Congress’s constitutional authority over tariffs. A federal appeals court has already found the administration’s blanket tariffs to exceed powers under the 1977 International Emergency Economic Powers Act (IEEPA). By imposing duties outside existing U.S. trade agreements, the administration shook confidence in America’s international economic commitments—a key pillar of trust in the dollar system.
At the same time, the White House has repeatedly questioned the Fed’s independence. For foreigners to keep buying low-yield Treasuries, they must trust the U.S. will not erode their holdings via inflation. Here, Rogoff’s point is compelling: Treasuries are seen as safe partly because the Fed has maintained independence and low, stable inflation since the mid-1980s.
Thus the risk of rising inflation and higher unemployment—paired with tariff shocks—puts the Fed’s policy committee in a tight corner. The president has criticised the Fed for not cutting rates quickly, threatened to fire its chair, removed a governor without due process (an action blocked by the courts), and appointed a new governor from the White House staff—all unprecedented steps. This amounts to a direct attack on institutional independence, accompanied by the claim that rate cuts should slash interest costs on a swelling national debt—supposedly saving “about a trillion dollars at the stroke of a pen.”
But if investors believe the Fed will prioritise debt management over its legal mandate to fight inflation, they will demand higher yields to offset expected inflation, raising federal interest costs rather than lowering them.
Similarly, after a weak July jobs report from the Bureau of Labor Statistics, the president dismissed the Senate-confirmed agency head. Such moves threaten the independence of statistical agencies and the integrity of official data—data on which investors rely to assess the U.S. economy and financial system. Confidence in the quality of statistics is part of confidence in the dollar.
Playing with Fire
All this unfolds as a new spending law adds over $4 trillion to U.S. debt over ten years. U.S. debt already stands near 100% of GDP, with interest costs rising annually. As borrowing ramps up, attacking the foundations of dollar dominance threatens the very advantages that sustain demand for Treasuries and have saved over a trillion dollars in debt service over the past decade.
Early signs have already appeared. In the immediate wake of these measures, financial markets reacted sharply: long-term Treasury yields rose, borrowing costs increased, and the dollar weakened. The administration then softened its stance. On 9 April, one week after announcing blanket tariffs—amid rising yields, a weaker dollar, and a falling stock market—the president paused implementation for 90 days.
But after public threats on 17 April to remove the Fed chair—and a senior official’s confirmation the next day that the option was being studied—stocks and bonds again moved adversely and the dollar fell. On 22 April, the president retreated, declaring no intention to dismiss the chair.
Even so, it would be foolish to assume alternatives to the dollar are so weak that Washington can violate norms and commitments indefinitely without consequence. While no single currency can replace the dollar today, there is a serious risk that its centrality will erode over time. The dollar’s share of global reserves has already fallen by more than ten percentage points since 2000. Financial and payments innovation is accelerating, and competing states are working hard to build alternatives to the dollar-based order.
The case for preserving the dollar’s privilege is stronger than ever: swelling deficits require low debt-service costs, and Washington’s sanctions strategy depends on the financial reach the dollar affords.
But if the current administration continues to attack the Fed’s independence and that of statistical agencies, and keeps undermining U.S. credibility in international commitments, it may erode the very dominance on which much of America’s internal and external policy relies. The dollar is not immune to risk. This is no time for reckless choices or blind luck. Should the U.S. currency fall from its throne, all Americans will bear the cost.
