Economists, Professors Philippe Bacchetta and Gianluca Benigno explore the dominance of the American dollar. Erratic U.S. trade policies, a significant fiscal deficit and threats to the independence of the Federal Reserve could badly affect the currency’s preeminent standing. It’s time to give the globe’s reserve currency a health check via academic research.
The greenback remains the world’s dominant currency, underpinning the global monetary system, 60% of foreign exchange reserves are still held in U.S. dollars, according to the IMF.1 Central banks around the world rely on it to stabilise their economies, manage debt and implement trade policies.
Yet the dollar’s extraordinary privilege, which allowed the U.S. government to borrow at discounted rates, is now being questioned. The depreciation of the greenback to multi-year lows earlier this year has also brought further concern.
America’s unsustainable debt trajectory, which is more strained as the period of very low, long-term real interest rates ends, alongside political volatility under the Trump administration, means that the supremacy of the dollar is in the crosshairs.
“Global banks outside of the U.S., especially those that have significant exposure to the American currency, must think hard about dollar funding over time,” explains Philippe Bacchetta, Professor of Economics at HEC Lausanne.
The professor and other academics have shown through modelling that severe dollar funding shocks, could lead to a bank run on global non-U.S. banks.2 A reliance on this singular currency represents a source of vulnerability for the global financial system, especially if there’s a shortage of dollars in circulation around the world in the future.3
“When there’s massive financial stress, there will be less dollar funding outside the U.S. and dollar financing becomes more costly. Unlike U.S. banks, those outside of America cannot borrow directly from the Federal Reserve but only indirectly from their own central banks who may ask for dollar swaps. This is a real vulnerability,” states Professor Bacchetta.
The U.S. Federal Reserve intervened during the Global Financial Crisis, the European debt crisis and the Covid-19 pandemic to ensure that global dollar funding markets did not seize up. However, there are now fresh concerns that the Fed may not step in again without making conditions on overseas financial institutions. These could be dependent on tariffs, US exports or geopolitical goals. 4
The politicisation of the dollar is something that Gianluca Benigno, also a professor of economics at HEC Lausanne, has been focusing on. He states that the dollar is not a neutral stable currency, but a geopolitical instrument that could be used in economic confrontations. 5
“The conflict in Ukraine is a good example of recent financial weaponisation, where Russia’s central bank assets were seized and it was closed out of the global SWIFT payment system. This made other countries realise that they need to find an alternative to the dollar,” explains Professor Benigno, who also publishes the “Central Banks Watcher.” 6
His research shows that the international monetary system still functions through an ‘imperial circle,’ beholden to the dollar when global economic times are good, as well as bad — and increasingly so, and that breaking free from the cyclical dependencies of the greenback is challenging.7
The big question now is: what alternatives do nation states have to the U.S. dollar? China wants to reduce its dependence and promote its own currency. Despite efforts, the Renminbi only account for less than 3% of global payments and foreign reserves.
Tech-based developments offer decentralised alternatives. However, bitcoin and other cryptocurrencies suffer from price volatility and a lack of institutional backing, limiting their use.
“Stablecoins have emerged as a more credible alternative. Ironically, the most promising are still backed by the U.S. dollar and American assets. However, they could evolve into dollar substitutes that operate outside the traditional banking system. The challenge is to find an alternative,” states Professor Benigno.
One possible outcome that Benigno envisages is a scenario of monetary fragmentation over time where no currency dominates.
“There could be a number of configurations. One centred around a U.S. dollar bloc involving America, Western allies, Latin America, and oil-exporting countries. A RMB bloc, encompassing parts of Asia, Russia, and China’s Belt and Road partners, and a digital currency or stablecoin enabling cross-border settlements without banks,” he explains.
Benigno concludes: “It’s not obvious how this complex system would work. It might be less efficient increasing transaction costs and reducing liquidity. But it might be a better reflection of a multi-polar world economy, as opposed to one centered on a single financial hegemon – the dollar.”
References:
- Dollar Dominance in the International Reserve System: An Update, International Monetary Fund, 11 June 2024
- Dollar Funding Fragility and non-US Global Banks, P Bacchetta, J.S Davis, E van Wincoop, Swiss Finance Institute Research Paper No. 25-65, 26 March 2025
- Offshore Dollar Funding Shocks and the Dollar Exchange Rate, P Bacchetta, J.S Davis, E van Wincoop, University of Lausanne manuscript, 24 January 2025
- A wrong Fed could do the dollar in, Michael D Bordo and Robert N McCauley, Financial Times, 4 Sept 2025
- The challenge threatening the independence of central banks, Gianluca Benigno, Korea Herald, 7 August 2025
- The Central Banks Watcher, Gianluca Benigno.
- The Dollar’s Imperial Circle, O Akinci, G Benigno, S Pelin, J Turek, IMF Economic Review 72 (2), 653-700, 6 September 2024.
