Is the dollar’s hegemony questioned? A multicurrency framework for the world

The world faces a period of uncertainty, that could be defined as “interregnum,” where a new world order cannot yet be born, but the old one is dying. The unipolar moment is definitely in the past, and geopolitical tensions and growing competition between China and the United States are evident. In this context, a rivalry over monetary dominance is emerging in this new era of geoeconomics. Moreover, since April, the U.S. has been perceived as riskier, and the dollar has depreciated sharply. In fact, the reciprocal tariffs imposed by the United States in the fourth month of the year marked a key moment for international trade and the global economy. Against this backdrop, it is valid to ask whether the dollar’s hegemony is being questioned. 

While at the start of the new millennium the dollar accounted for approximately 70% of global reserves, by 2009 it had declined to 62%, and today it stands at around 57%. The global financial crisis at the end of the first decade of the 2000s marked a turning point, with emerging markets playing an increasingly important role. 

Looking to China

China has promoted the internationalization of the yuan (RMB) through various mechanisms. These include instruments such as the Cross-Border Interbank Payment System (CIPS), the yuan’s inclusion in the IMF’s Special Drawing Rights (SDR) basket a decade ago, yuan-denominated commodity contracts, the launch of the e-CNY (digital yuan), and, last but not least, swap lines. The People’s Bank of China has signed more than 40 agreements with other central banks. In fact, our monetary authority was the first in Latin America to enter into a currency swap agreement with China, during my tenure as Governor at the Central Bank of Argentina. 

Let me illustrate this point with my experience with the Chinese currency. Early February 2009, on the occasion of the 50^th Anniversary of Bank Negara Malaysia, I shared a panel with the President of the People’s Bank of China, Zhou Xiaochuan, to explain the effect of the global financial crisis on emerging markets. After that, we had an informal lunch to share the challenges that we faced in that environment. At that time, China had signed agreements with Asian countries such as South Korea, Malaysia, Indonesia, Hong Kong, and the Republic of Belarus. My counterpart shared his view that China has started to internationalize its currency with a bilateral approach through currency swaps. He specifically mentioned that his country will not open its capital account, and therefore the yuan will not be convertible, unless authorized by its monetary authority. 

Under this approach, I proposed to sign the first currency swap with a Latin American country, which we formalized at the Annual IDB (Inter-American Development Bank) meeting in Medellin, Colombia, in March 2009. Our plan was that either central bank could request up to US$10.2 billion in the domestic currency of the other, in the event of a loss of reserves due to pressures stemming from international or local crises, as I detailed in my book “No reserve: The Limit of Absolute Power” (published by Amazon). Since then, it has become evident that the Chinese authorities do not want to make the yuan convertible, so as not to be exposed to external capital flows, which will increase local volatility and appreciate its currency.

It is undeniable that the yuan has grown in importance in international trade. Furthermore, other countries may increase its use to hedge against long-term uncertainty, especially in light of U.S. measures taken this year that shocked the world. China’s renminbi recently accounted for approximately 4% of global payments (up from 2%), it also represents 54% of China’s cross-border transactions and has reached a 2.2% share of global foreign exchange reserves. Given that China’s share of global trade is around 13%, the currency still holds significant potential.

Despite the remarkable rise of the RMB, its figures are still not comparable to those of other major currencies. Global reserves in RMB remain well behind those held in U.S. dollars (57%) and euros (19.8%). The reason is simple: China does not want to lose control over its exchange rate policy. As China remains with capital controls (though there has been liberalization recently), this limits the Yuan liquidity and convertibility. 

The Euro stability

Regarding other currencies that may challenge the dollar’s hegemony, the euro’s stability and regulatory framework are valuable assets. It should be noted that the gold has surpassed the euro to become the second-largest reserve asset held by central banks worldwide. Therefore, this currency is still far from becoming a truly global currency. Among many reasons, I will underline the lack of a unified fiscal policy in the Euro zone, which limits the supply and liquidity of euro-denominated assets needed to function as reserve instruments. Moreover, the path toward fully integrated capital markets remains long, hindering deeper financial integration. 

During the pandemic, the European Commission issued common debt for the first time, but it was a one-time emergency measure. Looking ahead, France has recently supported exploring initiatives aimed at strengthening the euro’s role as an international currency, in light of the unique opportunity presented by a shifting global order. The vision is that, as investors seek safer alternatives to U.S. Treasury securities, the EU should expand joint debt issuance to meet this demand. In short, achieving this will require Europe to increase the supply of safe assets, a move that is not supported by all member states.

Other challenges to the US dollar

Another player worth mentioning due to its growing presence is cryptocurrencies, CBDCs (Central Bank Digital Currencies) and stablecoins. Regarding the first, they are still highly unstable and therefore cannot be used as a reliable store of value. They tend to behave like speculative assets, closely following market sentiment. Moreover, their liquidity remains low: given the size of the market, buying or selling global reserves could significantly impact their price. Thus, if they manage to become stable and liquid, they could be used in some countries to diversify exposure. 

As for the second, no central bank is likely to give up its monopoly over its monetary and financial policy. CBDCs may increase their role in trade and help reduce transaction costs, but institutional guarantees and legal stability are still needed. And in the case of the third, most major stablecoins are pegged to the U.S. dollar. Therefore, the rise of digital assets may not lead to dedollarization, but rather to their coexistence with fiat currencies.

Finally, it is worth noting the growing importance of commodity currencies, which have recently attracted investor attention through carry trade strategies. The Australian dollar, Canadian dollar, New Zealand dollar, Norwegian krone, and Chilean peso are examples of such currencies. Indeed, they have strengthened this year. These types of currencies are typically more volatile and dependent on commodity prices, but it is worthwhile to keep an eye on them and their evolution. In the same vein, there has recently been interest among BRICS countries (Brazil, Russia, India, China, South Africa) in increasing payments in domestic currencies — an important initiative, though still far from becoming truly significant.

Final thoughts

In summary, the dollar has become a “primus inter pares” (first among equals). A new multicurrency system has emerged, as we witness the behavior of Central Bank reserves and private investors through multiple institutions. In the coming years, we may observe increasing competition among different monetary alternatives. This suggests that in the coming years, the U.S. dollar’s share in global reserves may decline, yet remain the dominant currency, holding around half of total reserves. Meanwhile, the yuan’s share could rise to approximately 5%, and the euro returning to 20%.

However, the U.S. dollar may face medium- to long-term challenges that could cause these trends to shift more abruptly. Two key risk factors stand out. The first is the rising U.S. debt and interest rates, which could undermine confidence in the dollar’s sustainability. For example, at the May 21st auction, demand for the 20-year U.S. Treasury bond was weak, pushing the yield up to 5.047% — over one basis point higher — amid concerns over the U.S. fiscal deficit. This is a key indicator that should be closely monitored. The second is the intensifying geopolitical rivalry, which could lead to broader military conflicts, potentially fragmenting the global order and accelerating the adoption of alternative currencies. In the long run, the challenges facing the U.S. dollar will depend largely on how the United States manages its own domestic vulnerabilities, including rising debt, fiscal imbalances, and its international policy stance.

As I stated fifteen years ago: I do not believe there should be a single reference currency, but rather several. Yet, so far there is no currency which holds the elements needed to replace the dollar.