- The U.S. Dollar remains dominant in global finance but rising debt, political dysfunction, and weakening trust are accelerating its vulnerabilities.
- Economist Barry Eichengreen warns that the very forces once assumed to unfold slowly are now converging rapidly, threatening the foundations of the world’s safe haven asset.
- If confidence in the Dollar falters before alternatives are ready, the world could face a fragmented, less liquid financial system with no clear anchor.
Trust isn’t built overnight. It’s slow, boring, cumulative, and it takes years of steady behavior to convince people that you’ll do what you say, when you say it, without surprises. But trust can collapse in a moment: one policy misstep, one political crisis, one bad decision at the wrong time. That could be the biggest danger now facing the U.S. Dollar.
For nearly a century, the Dollar has been the cornerstone of global finance, the reserve asset of choice, and the place investors flee when the world gets scary. It’s been the default setting for international trade, cross-border loans, and sovereign reserves. But it’s all held together by one thing mostly: confidence.
Barry Eichengreen, a leading scholar of international finance and economic history, believes that confidence is starting to erode. Slowly at first, but with the risk of unraveling quickly. He argues that the forces that were once expected to challenge the Dollar’s dominance over decades, including rising debt, political instability, and the emergence of rival currencies, are now arriving all at once.
The Dollar remains dominant. But dominance isn’t the same as invincibility, and history has a way of reminding us that the center holds, until the moment it doesn’t.
A Story Built on Stability
In his 2011 book Exorbitant Privilege, Eichengreen described the Dollar’s global role as a kind of financial inheritance. The United States was the world’s largest economy, its deepest capital market, and its most trusted steward of rule-based governance. That combination made the Dollar the apparent choice to denominate trade, issue debt, and settle disputes.
But the book also made a prediction. Over time, Eichengreen wrote, the Dollar’s dominance would fade. Not suddenly, not dramatically, but gradually, in parallel with America’s shrinking share of global output and influence. He argued that the Dollar wouldn’t disappear, but it would simply make room on the stage for other currencies, like the euro or Chinese renminbi, among others.
That forecast assumed a stable geopolitical climate. It assumed rational policymaking, credible institutions, and long-term planning. What it didn’t assume was a U.S. political system increasingly paralyzed, a debt trajectory untethered from economic cycles, or a public discourse willing to treat fiscal brinkmanship as business as usual.
In short, it assumed the America we used to know, not the one we’re now watching unfold…
When Deficits Stop Mattering, Until They Do
The numbers are staggering. The United States is now running deficits equivalent to 7 percent of GDP, even in a time of low unemployment and modest growth. In a stable economy, that level of borrowing used to be unthinkable.
More alarming is the bipartisan apathy toward it. There’s no mainstream plan to rein it in, no political appetite for entitlement reform or tax restructuring, and no clear consensus that this even qualifies as a crisis.
Historically, high debt loads have been manageable when economies grow faster than they borrow. But the math becomes dangerous when that flips. Economists refer to this as the “R-G” problem: when the interest rate on government debt (“R”) exceeds the economy's growth rate (“G”), debt compounds rapidly.
In theory, a productivity boom could bail us out. Some point to artificial intelligence as a catalyst for the next growth surge, but Eichengreen urges caution. History shows that revolutionary technologies, from electricity to the internet, often take decades to boost output meaningfully. Before they transform economies, they disrupt them. Companies reorganize, industries adjust, and workers retrain. The gains come eventually, but rarely in time to solve immediate problems.
And inflation might buy time by reducing the real burden of debt, but it only works once. After a surprise inflation event, markets adapt. They demand higher yields, reset expectations, and adjust prices.
The Safe Asset at the Center of the Storm
U.S. Treasuries have long been the backbone of global finance. They are considered the safest asset in the world: liquid, dependable, and backed by the full faith of the U.S. government. But what happens when that faith starts to crack?
Eichengreen points to growing fragility in the Treasury market. Liquidity has deteriorated in recent years. Large dealers, the banks and institutions responsible for absorbing and redistributing government debt, are constrained by regulations that limit how much they can hold. During moments of market stress, this bottleneck can amplify volatility rather than dampen it.
Worse, the Treasury market is increasingly being asked to do more than it was designed for. It must absorb trillions in new issuance, respond to real-time shocks, and act as a policy tool, all while being traded like a commodity.
Then there’s the political risk. The idea that a future administration might pressure the Federal Reserve to hold rates artificially low or interfere in Treasury operations adds another layer of uncertainty. In the past, crises drove investors toward Treasuries. Today, the next crisis could originate from within them.
The Real Risk: Not Replacement, But Absence
There’s a standard narrative that the Dollar can’t lose its role because there’s no viable alternative. And in a narrow sense, that’s true.
A fragmented fiscal system backs the Euro and lacks the deep, unified capital markets needed to support large-scale reserve flows. While rising, the Chinese renminbi is constrained by capital controls and opaque governance. Other currencies, from the Yen to the Swiss Franc, are too small to lead.
But this binary framing, either the Dollar dominates or something else does, misses a crucial possibility.
The most disruptive outcome may not be that another currency takes over. It may be that no currency does. If the Dollar falters before a replacement is ready, the global financial system could fracture. Cross-border trade could become less efficient, and global liquidity could dry up.
In the 1930s, Eichengreen notes, the world experienced a similar moment. Capital fled from Sterling and the Dollar. Liquidity vanished, which, of course, resulted in chaos. History rhymes, yes, but it also innovates. Today’s risks are bigger, faster, and arguably more tightly linked than ever before.
The Fed Is Running Out of Rope
The Federal Reserve may be the last institution still broadly respected in U.S. governance. But even it is facing a narrowing corridor of options. Raise rates, and it risks slowing the economy and increasing the cost of debt service. Cut them, and it may fall behind the curve on inflation, jeopardizing its credibility.
It’s also facing political heat. If inflation rises, and the government continues to borrow aggressively, elected officials may pressure the Fed to keep rates low. This would amount to fiscal dominance: a world in which monetary policy is subordinated to government financing needs.
In that world, the Fed doesn’t get to focus on employment or price stability. It becomes the backstop for fiscal irresponsibility. Some argue that shift would be dangerous, and markets would respond accordingly.
What the Next Era Might Look Like
So, where does this leave us?
The Dollar may remain dominant by default: less because it’s perfect, and more because everything else is flawed. That inertia is powerful, but inertia isn’t immunity.
Another scenario is fragmentation. Rather than one global currency, we could see a patchwork of regional arrangements. Countries might settle trade in local currencies. New payment platforms, like China’s Project mBridge, may bypass the Dollar entirely. Central bank digital currencies could introduce new channels for settlement, clearing, and storage. These developments won’t happen overnight, but they’re happening.
Each one chips away at the idea that the Dollar is indispensable. Trust, once lost, is hard to regain, especially in a system that depends on it.
The dollar has earned the world’s trust over the course of several decades. But that trust has always come with strings attached: fiscal responsibility, political stability, and credible institutions. Those strings are fraying. If the world starts to believe the United States can no longer be counted on to uphold those standards, it won’t wait for a formal replacement. It will quietly begin to move, and when it does, the shift may feel sudden, even if the signs were always there.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.
