Dollar dominance in the global financial system

The most important message from the latest reserve manager evidence is that beliefs are changing faster than allocations. Across recent survey rounds, reserve managers express more concern about US fiscal dynamics, political dysfunction, the erosion of institutional trust, and the strategic use of sanctions and financial infrastructure. These are no longer fringe concerns. They are increasingly part of mainstream reserve management thinking. And yet this has not translated into large-scale reallocation away from the dollar. The reason is not inconsistency. It is constraint. Reserve managers may be less comfortable with the system than they were a decade ago, but they still depend on it to deliver liquidity at scale, especially in periods of stress. In that sense, dollar dominance today rests less on enthusiasm than on the lack of a truly comparable substitute.

Figure 1: Expected deterioration of key economic and institutional factors in the US

For reserve managers, this is not a symbolic debate about prestige or geopolitical branding. It is a functional question. US Treasury markets remain unmatched in size and tradability. Dollar assets sit at the core of the global collateral system. Trade invoicing, funding markets, and payments infrastructure are still overwhelmingly dollar-based. That means the dollar is not just one reserve currency among others. It is deeply embedded in the operating system of global finance. Even institutions that want to diversify have to do so carefully, because moving too far or too fast may involve sacrificing liquidity, flexibility, benchmark stability, or political cover. The original article’s discussion of Treasury market depth and central bank swap capacity helps explain this point clearly: the issue is not only who is trusted most, but who can still provide safety and liquidity at scale when markets come under pressure.

The weakening of confidence is tied to a broader shift in what reserve managers now consider systemic risk. Earlier debates often centered on inflation, interest rates, or macro imbalances. Today, geopolitical fragmentation, asset freezes, sanctions, and questions about the neutrality of financial infrastructure carry much greater weight. Concerns about fiscal sustainability in the US matter too, but often as part of a larger concern: whether the institutional architecture that underpins dollar dominance will remain as credible, predictable, and politically insulated as it once appeared. The survey findings on institutional deterioration, and the chart evidence on expected demand for US debt and the dollar, illustrate this divergence particularly well. Reserve managers can simultaneously worry more about the foundations of the system and still expect the dollar to remain dominant. That is not a contradiction. It is a reflection of how much inertia is built into the system.

The euro remains the strongest alternative on paper. It offers institutional credibility, economic scale, and renewed interest among reserve managers. The survey material in the original article suggests that it is once again being added on a net basis by more institutions than in previous years. But the euro’s limits remain structural. Without a genuinely unified euro-area safe asset and deeper capital market integration, its reserve role is likely to expand only gradually. The renminbi presents a different proposition: strategically relevant, increasingly visible, but constrained by capital controls, governance concerns, and geopolitical risk. Reserve managers may hold it as a diversification asset, but only rarely as a core reserve anchor. Gold, by contrast, is gaining importance precisely because it sits outside the issuer-based system. It offers no yield and cannot perform the dollar’s liquidity function, but it is seen as protection against the kind of geopolitical tail risks that now feature more prominently in reserve management thinking. The chart material on euro allocations, renminbi exposure, and gold demand underscores the same message: diversification is happening, but mostly as layering rather than substitution.

Figure 2: Changes in EUR allocations among reserve managers, 2019–2025

For central banks, the current environment is less about engineering a post-dollar world than about managing a more fragile dollar-based one. That means preserving liquidity and optionality while gradually building resilience against geopolitical and institutional tail risks. In practice, this often translates into modestly higher gold allocations, selective diversification into smaller currencies, cautious experimentation with renminbi assets, and a growing interest in whether Europe can create the institutional conditions for a stronger reserve role for the euro. But reserve managers remain conservative for good reason. Their job is not to make grand strategic bets on currency transition. It is to protect public assets, preserve market access, and maintain the capacity to respond in crisis. That creates a strong bias toward incrementalism, even when the strategic case for diversification is becoming more compelling.

Four scenarios for the global financial system

The source paper sets out four possible paths for the international monetary system. In the baseline, the dollar remains dominant while reserve managers diversify gradually at the margins. In a multipolar transition, the euro, renminbi and gold play larger roles, but only if institutional reforms and market depth improve. In a fragmentation scenario, geopolitical blocs and regional payment systems reshape reserve choices more visibly. And in a shock-driven transition, a severe loss of confidence in US assets forces faster diversification, but with higher volatility because no full substitute for the dollar is ready. The key message is that change is more likely to be cautious and constrained unless a crisis forces reserve managers to move faster than they would prefer.

The most plausible near-term future is not abrupt de-dollarization, but cautious diversification within a still dollar-centered system. That makes this less a story of replacement than of repricing. Reserve managers are assigning more weight to political, legal, and geopolitical risk, even as they remain operationally anchored to the dollar. The longer this gap persists, the more brittle the system may become. As long as no alternative offers the same mix of market depth, legal certainty, collateral centrality, and crisis elasticity, the dollar is likely to remain dominant. But the nature of that dominance is changing. It is becoming more conditional, more contested, and more dependent on preserving institutional credibility. If a more meaningful shift eventually comes, it is likely to be driven not by a smooth strategic handover, but by a shock that forces reserve managers to move faster than they would ever choose to under normal conditions.

Code : M-006064