Discuss of the U.S. greenback can have a frustratingly summary, near-mystical high quality to it. Even placing apart the crypto crowd’s pseudo-philosophizing about the way forward for cash, when most commentators converse of the greenback as a “reserve foreign money,” it’s typically imprecise and conjures up a picture of dollars saved in central financial institution vaults. This, in flip, is supposed to supply america with far-reaching financial superpowers.
But the destiny of the greenback is nonetheless an necessary story to inform, particularly lately. After April 2, when U.S. President Donald Trump imposed sweeping tariffs—bringing the U.S. common efficient tariff to its highest degree in almost a century—the greenback began behaving unusually. An financial textbook would inform you that U.S. tariff hikes strengthen the greenback: Increased duties lower U.S. demand for (now larger priced) international items and due to this fact demand to swap {dollars} for foreign currency echange to pay for these items. But the greenback fell after April 2—it has declined 8 p.c so far this yr—and there have been durations in April when the greenback fell, bond costs fell, and U.S. fairness markets fell, an alarming trifecta largely seen in rising markets as an indication of panicked capital flight. What’s occurring right here?
Discuss of the U.S. greenback can have a frustratingly summary, near-mystical high quality to it. Even placing apart the crypto crowd’s pseudo-philosophizing about the way forward for cash, when most commentators converse of the greenback as a “reserve foreign money,” it’s typically imprecise and conjures up a picture of dollars saved in central financial institution vaults. This, in flip, is supposed to supply america with far-reaching financial superpowers.
But the destiny of the greenback is nonetheless an necessary story to inform, particularly lately. After April 2, when U.S. President Donald Trump imposed sweeping tariffs—bringing the U.S. common efficient tariff to its highest degree in almost a century—the greenback began behaving unusually. An financial textbook would inform you that U.S. tariff hikes strengthen the greenback: Increased duties lower U.S. demand for (now larger priced) international items and due to this fact demand to swap {dollars} for foreign currency echange to pay for these items. But the greenback fell after April 2—it has declined 8 p.c so far this yr—and there have been durations in April when the greenback fell, bond costs fell, and U.S. fairness markets fell, an alarming trifecta largely seen in rising markets as an indication of panicked capital flight. What’s occurring right here?
Our Greenback, Your Drawback: An Insider’s View of Seven Turbulent Many years of World Finance, and the Highway Forward, Kenneth Rogoff, Yale College Press, 360 pp., $35, Could 2025
Into this fog strides Kenneth Rogoff, a former chief economist on the Worldwide Financial Fund (IMF), along with his fantastic new memoir-cum-prognostication Our Greenback, Your Drawback. If something, the guide is simply too narrowly titled. Sure, Rogoff places analytical meat on the bones of an typically maddeningly ethereal debate about the way forward for the greenback and why it issues. However he additionally supplies a top-bucket world tour of latest financial historical past and evaluation of the main world economies: america, European Union, China, and Japan.
Probably the most germane query lately is whether or not greenback supremacy can final in a world of abrasive and unstable U.S. financial policymaking and as refined rivals reminiscent of China and Russia search to construct a parallel monetary system insulated from the lengthy arm of U.S. sanctions. Maybe much more basically, some on the populist proper in america have begun to query whether or not the juice of the worldwide greenback is definitely worth the squeeze. Vice President J.D. Vance and others have argued that greenback supremacy has hollowed out U.S. manufacturing by growing the worth of the greenback and due to this fact the relative worth of U.S. exports.
To Rogoff, greenback dominance is greater than price it in gentle of its many advantages: from driving down U.S. rates of interest and spurring funding and financial development to foaming the runway for better U.S. borrowing throughout disaster to arming america with highly effective monetary sanctions.
But he additionally believes that the relative decline of the greenback is close to inevitable, even when it would stay crucial worldwide foreign money. The tempo of that decline, nonetheless, is an open query. The most important accelerants could be a bout of rampant U.S. inflation, a fiscal disaster introduced on by the runaway practice of U.S. debt, or an erosion of the independence of the U.S. Federal Reserve. In brief, the way forward for the worldwide greenback largely is dependent upon financial sanity prevailing in Washington, reasonably than machinations in Beijing or different international capitals.
A bunch of American vacationers in London learn a newspaper with unhealthy information concerning the greenback disaster as U.S. President Richard Nixon encourages People to tighten their belts.Frank Barratt/Keystone/Getty Photographs
To name the greenback the worldwide “reserve foreign money” is a considerably slim and outdated shorthand. Underneath the Bretton Woods system established in 1944, the greenback did act fairly actually because the world’s reserve foreign money: To stabilize world costs, Bretton Woods pegged every of the world’s currencies to the greenback, which was in flip pegged to gold at $35 per ounce. International central banks wanted to carry sufficient {dollars} in reserve to again their very own currencies, and america needed to maintain sufficient gold to again the promise of convertibility.
This all got here to an abrupt finish in 1971, when President Nixon crashed america out of the Bretton Woods system, ending greenback convertibility to gold. However the now free-floating greenback has remained the undisputed king of the worldwide financial system. As Rogoff factors out, greater than 60 p.c of nations use the greenback as a reference foreign money for anchoring their alternate charges. In the present day, the greenback nonetheless accounts for 59 p.c of international alternate reserves, although that quantity has dwindled from greater than 70 p.c in 2000.
However central financial institution reserves and foreign money pegs inform solely a small a part of the story. The greenback additionally serves because the lifeblood of worldwide finance. Former Wall Road Journal reporter Paul Blustein paints this image with readability and precision in his wonderful new guide, King Greenback. The dollar acts as an entirely unequalled automobile foreign money—a monetary lingua franca used to settle worldwide transactions.
King Greenback: The Previous and Way forward for the World’s Dominant Foreign money, Paul Blustein, Yale College Press, 320 pp., $35, March 2025
There’s a easy cause for this: Liquidity is missing throughout each international foreign money pair. So, if a Japanese firm desires to import Brazilian items, its financial institution first converts yen to {dollars}, which is then transformed to Brazilian reals to pay the exporter. Because of this almost 54 p.c of world exports (greater than 75 p.c outdoors Europe) are invoiced in {dollars} and 88 p.c of international alternate transactions embody the greenback. What’s extra, these cross-border transactions are almost all transmitted and cleared via correspondent financial institution branches situated in New York. Blustein notes that greater than 90 p.c of large-value, cross-border transactions in {dollars} are finally routed via the Clearing Home Interbank Funds System (CHIPS) in midtown Manhattan.
To allow this necessary function because the monetary lingua franca, the greenback possesses the important qualities of a automobile foreign money: a secure retailer of worth and deep liquidity (with about $5 trillion foreign money swaps and $1 trillion in U.S. Treasurys traded each day). Furthermore, there’s an intuitive community impact of banks all utilizing the identical language.
When you concentrate on the supremacy of the greenback on this manner, its place turns into much more unassailable. Latest threats from the BRICS grouping of nations, for instance, to create its personal foreign money dissolve into puffery. And what’s the choice? The yen is tied to an financial system representing 3.8 p.c of world GDP and falling, the euro confronted a near-existential debt disaster within the 2010s, and the Chinese language renminbi suffers from strict capital controls.
Economists are keen on utilizing “exorbitant privilege” to explain the advantages of greenback dominance, a highfalutin phrase coined by French Finance Minister Valéry Giscard d’Estaing in 1965. However what does this imply in follow? Rogoff pores over the tutorial literature and calculates that demand for the dollar as a monetary automobile drives down U.S. rates of interest by a minimum of 0.5 p.c, lowering the price of all the pieces, from U.S. authorities debt to shopper and enterprise borrowing. Half a p.c could appear to be a small quantity, however that’s $185 billion a yr on $37 trillion of U.S. authorities debt and $2,500 a yr on a $500,000 mortgage. These decrease financing prices, in addition to Washington’s enhanced potential to borrow in occasions of disaster, could also be price nearly 1 p.c of GDP.
The centrality of the greenback additionally arms Washington with devastating sanctions weaponry. Reduce off entry to the greenback and CHIPS, and international banks are nearly completely reduce off from the worldwide monetary system. This story is most definitively instructed in Edward Fishman’s superlative Chokepoints, a delectably readable narrative historical past of U.S. financial warfare in opposition to Iran, Russia, and China. U.S. sanction superpowers had been exhibited most consequentially in response to Russia’s 2022 invasion of Ukraine, throughout which america and its European allies froze some $300 billion in Russian central financial institution belongings and disconnected Russian banks from worldwide markets, plunging the worth of the ruble by a 3rd.
But, as Fishman describes, the Russian financial system didn’t fully soften down, as many predicted. Russia’s GDP fell by 1.4 p.c in 2022, solely to rebound to 4.1 p.c and 4.3 p.c in 2023 and 2024. This was partially because of Moscow’s adroit macroeconomic administration and diversion of commerce to China, although the exemption of Russia’s large power gross sales—accounting for round 40 p.c of presidency revenues—from Western sanctions actually helped.
Russia’s resilience highlights the regularly eroding nature of the greenback’s sanctions efficiency. Russia has realized to dwell underneath financial siege, and whereas tightening up power sanctions would deal one final main blow to the Russian financial system, there’s little else left to sanction. Furthermore, the Russian expertise isn’t misplaced on different potential sanctions targets, reminiscent of China. Because the world’s second-largest financial system and largest buying and selling energy, there’s no manner that Beijing can absolutely insulate itself from greenback publicity. But it surely continues to construct up its defenses in opposition to U.S. monetary warfare, most notably with its Cross-Border Interbank Cost System (CIPS)—a competitor to CHIPS—and efforts to conduct extra commerce in renminbi. In a future disaster, China can be higher ready to climate sanctions than it’s right now.
This doesn’t imply, nonetheless, that the renminbi is on the cusp of changing the greenback internationally. Removed from it: Uptake of CIPS has been lackluster, and the renminbi’s share of worldwide funds is stalled at round 4.5 p.c. A real internationalization of the renminbi would require China to open up its capital controls and persuade the worldwide monetary neighborhood that it’s a accountable stakeholder and can observe the rule of regulation. All very doubtful prospects anytime quickly.
Which brings us again to the response of markets to Trump’s tariffs. It’s one factor to economically batter Russia within the wake of its universally condemned invasion of Ukraine. It’s one other to antagonize Western allies with hostile tariffs and the specter of financial escalation. This understandably spooked worldwide buyers however has additionally catalyzed a counterresponse in Europe, the place European Central Financial institution chief Christine Lagarde is now banging the drum about strengthening the worldwide function of the euro. There’s even budding momentum round joint debt issuance, or a swap of current nationwide debt for pan-European bonds—a intelligent plan advocated by one other former IMF chief economist, Olivier Blanchard—which might create a bigger pool of bedrock euro “secure belongings” to compete with U.S. Treasurys.
For certain, there’s a lengthy highway to implementing any of this, and the limitations to structural integration of European monetary markets are formidable. However america could have simply inadvertently breathed life into the most important potential competitor to the greenback.
A person opens the door of a foreign money alternate workplace in Moscow on March 14.Getty Photographs Europe
Even when the greenback does lose some market share to the euro or renminbi, the boogeyman of a substitute of the greenback is extremely exaggerated. Actually, the greenback has lately shaken off its post-April 2 panic and reverted to extra regular habits, with the greenback strengthening after Trump’s July spherical of tariffs, simply because it ought to.
Rogoff and Blustein discover the potential for cryptocurrencies, stablecoins, and central financial institution digital currencies, or CBDCs, to rework the worldwide funds ecosystem, however the finish result’s largely a shrug. Crypto is helpful for the underground financial system—which Rogoff estimates at a whopping 17 p.c of gross nationwide revenue in superior economies—however little else. Stablecoins or CBDCs may marginally enhance funds effectivity however will nonetheless be linked to nationwide currencies and due to this fact topic to the legal guidelines of financial gravity. Principally, these improvements are options seeking an issue.
As each Rogoff and Blustein rightly level out, the most important threats to greenback dominance lie not in worldwide financial coverage however in U.S. home politics. Rogoff highlights spiraling nationwide debt unchecked by any political get together, which may result in a fiscal disaster and even outright default. Additionally threatening is the potential for runaway inflation that will erode the greenback’s enchantment as a retailer of worth.
The greenback’s most existential menace, nonetheless, is an upending of Federal Reserve independence and a normal deterioration within the rule of regulation that will problem the worldwide funding neighborhood’s view of america as a secure wager. Sadly, this end result is much less fanciful lately, as Trump badgers Fed Chair Jerome Powell and fires statisticians who print numbers he doesn’t like.
Ought to the greenback’s standing unwind due to such unforced errors, the prices could be structurally larger rates of interest, much less clout in world financial policymaking, and impotent sanctions powers. With each allies and rivals primed lately to seek out methods to buck the greenback, it might be sensible for U.S. policymakers to maintain these prices in thoughts. To paraphrase Benjamin Franklin’s quote about U.S. democracy within the wake of the Constitutional Conference: Greenback dominance is ours, if we will preserve it.
