The U.S. dollar’s dominance isn’t going anywhere - at least not soon.
That doesn’t mean I’m thrilled about the policies keeping it on top. But here’s the harsh truth: the dollar is still the prettiest mare in the slaughterhouse.
Remember, currencies are relative. For example, you can’t hold a euro and a dollar at the same time - you have to sell one to buy the other. And more often than not, people choose dollars.
But let’s not forget - history is littered with the graves of major reserve currencies that didn’t quite hold their dominance – from the Dutch Guilder and Spanish Real de a Ocho to the French Livre and British Pound Sterling.

Source: Dunham 2024
Even gold, the universal money, lost its crown in 1971 when it stopped anchoring governments to fiscal discipline.
Thus, it’s not a stretch to say that something will eventually replace the dollar.
So, the question is: what would that look like for the U.S. and the entire global economy?
While I can’t predict every twist, I see three scenarios: the good, the bad, and the ugly.
Let’s start with some context before diving in.
A Key Reminder Before We Begin
It’s crucial to understand the unbalanced floor the U.S. dollar stands on.
The U.S. runs chronic trade deficits - importing far more than it exports. In 2023 alone, the deficit reached a staggering $800 billion, dwarfing other nations.
- To put it in perspective, the U.S. accounts for over 40% of the combined trade deficits of the top 20 deficit countries. That’s an enormous concentration for just one economy.

Source: Statista, Dunham December 2024
Why does this happen? Because the dollar’s role as the global reserve currency makes it central to international trade.
As I’ve written before in “Triffin’s Dilemma: Why the U.S. Dollar’s Global Role is a Double-Edged Sword," the U.S. acts as the world’s consumer of last resort. When other economies weaken and aren’t consuming (like China today), they export their surplus goods and savings to the U.S., creating deficits that must persist.
- This is why the U.S. doesn’t “import” recessions - it exports them. Because when U.S. consumers slow down, the entire world feels it, not the other way around.
And the U.S. pays for these deficits with dollars. But these trillions of dollars don’t sit idle under foreign mattresses. No, they are reinvested into U.S. assets like Treasuries, stocks, and real estate - or lent out as dollar-denominated debt through banks.
This cycle – aka “dollar recycling1” - keeps the currency strong, allowing Americans to consume cheaply and borrow at low interest rates.
But it also creates unintended consequences. . .
A System Exploited? Yes.
This strategy puts enormous pressure on U.S. factories, leading to job losses and widening trade deficits. Meanwhile, countries like China, Japan, and Germany enjoy trade surpluses by flooding the U.S. market with their goods while suppressing American exports.
Beware The Echoes of Mercantilism
What these economies do is a modern echo of mercantilism - the 16th-to-18th-century economic theory where nations maximized exports, minimized imports, and hoarded wealth (sound familiar?). It’s essentially a game of accumulation, similar to how colonies once funneled wealth to imperial powers (hence why France, Britain, and Germany all rushed to build out colonies).
- Fun Fact: Adam Smith, the father of capitalism, debunked mercantilism in The Wealth of Nations (1776). He argued that wealth isn’t about hoarding—it’s about what you can spend it on, like goods and services that improve living standards. Yet today, nations deploy mercantilist tactics against the U.S., benefiting from our consumption while suppressing their own.
The Cost of a Strong Dollar
This dynamic has serious consequences. All this dollar hoarding drives up the price of the dollar – which then ups the cost of U.S. goods abroad - making them less competitive and hurting exports. Meanwhile, at home, it crushes U.S. manufacturing jobs and raises unemployment (more on this below).
Thus, to keep the economy moving, the U.S. increasingly borrows and spends - feeding a vicious cycle that can’t go on forever as it causes inflation.
So, while the U.S. dollar as the major reserve currency has its privileges – it also has its burdens.
Keep all this in mind going forward.
Let’s Start With The Good
Surprisingly, there’s a silver lining if the dollar loses its reserve currency status.
U.S. exports and its manufacturing sector could rise from the dead and reduce the trade deficit.
This happens in two key ways:
- Lower Imports: When the dollar weakens, imports get more expensive. This then also makes American-made goods more competitive, boosting domestic production.
- Higher Exports: A weaker dollar makes U.S. goods cheaper for foreign buyers, spurring demand and increasing global competitiveness.
The stakes here are significant. Manufacturing in the U.S. has been on the ropes for decades. For perspective, in 1979, it employed 20 million Americans. Today? Just 12 million - a whopping 40% drop.

Source: St. Louis Federal Reserve, Dunham December 2024
Losing the reserve status could shift this balance, giving American workers and industries a fighting chance. It could also attract investment into the U.S. manufacturing sector, creating ripple effects throughout the economy. Imagine the labor, raw materials, and infrastructure needed to rebuild American manufacturing through onshoring.
Another potential upside is how a weaker dollar might help ease the debt burden.
- For borrowers - including the U.S. government - inflation reduces the real value of debt, making it easier to repay fixed-rate loans. This process, often called “inflating away the debt", offers relief to households and governments alike.
Think of it like this. If you have a fixed 30-year mortgage while your salary and home value rise with inflation, your monthly payment stays the same but feels smaller over time as your income grows.
However, this benefit only holds if rising interest rates don’t wipe out the gains (more on that below).
Now The Bad
So, while a weaker U.S. dollar might boost exports and help debtors, it comes with a steep downside: higher costs for American consumers and creditors - anyone with more savings than debt.
And this isn’t a minor issue. The U.S. economy leans heavily on consumer spending, which makes up roughly 70% of economic growth.

Source: U.S. Bureau of Economic Analysis, Dunham December 2024
When imports get pricier, inflation kicks in, raising costs across the board. Businesses face higher expenses for raw materials, labor, and production - and these costs often get passed directly to consumers, reinforcing the inflation.
The result? Household budgets tighten, spending slows, and economic growth stalls. This creates a vicious cycle: higher prices squeeze spending, which weakens growth, making it even harder for families to stay afloat.
Put simply, for most Americans, a weaker dollar means paying more for less - a tough trade-off that ripples through quality of life and the broader economy.
Worse, a weaker dollar erodes the value of money saved in the bank, foreign coffers, or retirement funds. Prices for essentials like food and gas climb, but savings don’t grow fast enough to keep pace. For those on fixed incomes - like grandparents relying on steady retirement payments - it becomes harder to afford everyday needs.
- It’s like watching a piggy bank you’ve carefully filled for years shrink, even though you haven’t spent a single penny.
Finally, The Ugly
The U.S. dollar’s status as the world’s primary reserve currency has long supported the entire nation's economic stability and global influence.
And if the dollar were to lose this role, the consequences would ripple far and wide.
For starters, diminished demand for dollar-denominated assets like Treasury bonds would force the U.S. government to offer higher interest rates to attract buyers.
Any higher interest rates would only amplify this burden.

Source: St. Louis Federal Reserve, Dunham December 2024
As a result, the government would face tighter constraints on spending, potentially slashing budgets for critical priorities like defense, infrastructure, education, and healthcare. This could trigger serious political tensions and provoke a volatile public response.
On the geopolitical front, the dollar’s dominance supports the United States’ ability to shape international trade, finance, and policy. A reduced role for the dollar would weaken its ability to impose economic sanctions or influence global financial systems - undermining both its geopolitical and military standing.
And worst of all, most global debt and financial assets are priced in dollars - so it would have profound repercussions for asset prices and balance sheets all over the world..
Together, these economic, financial, and diplomatic repercussions paint a stark picture of what losing reserve currency status could mean.
And it’s not just the U.S. economy at stake - the entire world would feel the shockwave.
As mentioned earlier, the U.S. accounts for over 40% of the combined trade deficits of the top 20 deficit nations. Thus, if the U.S. deficit were to suddenly drop to zero due to a collapsing dollar and soaring debt costs - it would effectively wipe out 40% of global demand for goods.
- Put simply, imagine running a business where over 40% of your annual sales come from one customer - then one day, that customer shuts down. The impact on your bottom line and operations would be devastating.
Export-driven economies like China, Japan, and Germany would take the hardest hits. Without the U.S. to absorb their surplus goods, they’d face massive inventories, rising unemployment, and waves of corporate bankruptcies. Finding another buyer on America’s scale? There isn’t one.
This would be an ugly global situation that no foreign nations are interested in kicking off.
Conclusion: A Double-Edged Sword
The U.S. dollar’s dominance is both a privilege and a burden.
While its role as the world’s reserve currency brings economic stability and influence, it also creates vulnerabilities that ripple through the domestic and global economy.
From boosting exports to inflating away debt, a weaker dollar has potential upsides. But the downsides - like rising costs for American households, tightening fiscal constraints, and geopolitical risks - paint a more troubling picture.
If the dollar were to lose its crown entirely, the consequences would extend far beyond America’s borders. Global economies reliant on U.S. demand would face crippling losses, creating a chain reaction of instability.
For now, the dollar is still the world’s backbone. But history is clear - no currency rules forever.
As always, this is just some food for thought.
Sources:
- Money Matters, an IMF Exhibit -- The Importance of Global Cooperation, Reinventing the System (1972-1981)
- China is considering softer currency | Reuters
- Foreign reserves by country 2024 | Statista
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
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