Why the National Debt Matters for the Dollar and Global Economic Strength

Since World War II, the dollar has played a dominant role in global financial markets, maintaining America’s global economic leadership. This affords the United States “exorbitant” privileges no other country enjoys, such as lower borrowing costs, the absence of fluctuations in the value of its debt due to exchange rates, and the power to impose far-reaching sanctions on its adversaries. The dollar’s centrality is underpinned by extremely high faith by investors in U.S. creditworthiness.

• Confidence in U.S. creditworthiness may be undermined by a rapidly deteriorating fiscal situation, an increasing concern with federal debt set to grow substantially in the coming years.
• A loss of America’s relative economic advantage due to fiscal mismanagement would lead to lower growth, higher unemployment, and less investment wealth in the long run.
• Regular brinkmanship over addressing the federal debt limit—a symptom of broader fiscal dysfunction and mismanagement—could have a catastrophic impact on the U.S. credit rating, the dollar’s role, and U.S. global leadership.

Risks of Growing Public Debt

Our national debt has grown rapidly over the past quarter of a century. Debt held by the public sits at $28 trillion, almost 100% of gross domestic product, meaning it is roughly equal to the nation’s annual economic output. The gross debt is even higher, nearing $36 trillion. The debt to GDP ratio is near record levels, and the Congressional Budget Office projects debt to continue outpacing economic growth in the decades to come. As the national debt rises, increasing shares of government revenues are diverted towards interest payments on the debt, which are now close to $3,000 per individual each year.

Declining Confidence in the Dollar Reduces Our Economic Strength

The dollar is dominant in global financial markets, as evidenced by its use in nearly 90% of global foreign exchange transactions, nearly 60% of global foreign exchange reserves, and invoicing for over half of global trade. However, the growing U.S. national debt may diminish the dollar’s global preeminence and U.S. leadership on the international stage. It could mean a loss of the exorbitant privileges the U.S. enjoys, which would lead to lower economic growth, higher unemployment, and lower equity wealth in the long run.

The weakening of the dollar’s status could reduce U.S. businesses’ attractiveness to global credit and capital markets, leading to higher barriers to financing new investments and expanding operations. Businesses and consumers who rely on imported goods could also face higher prices.

Rising Debt Undermines Confidence in U.S. Creditworthiness

With America’s fiscal trajectory set to worsen and seemingly no appetite among leaders in either party to address it, investors’ strong faith in the country’s ability and commitment to meet its debt obligations could begin to waver. The Treasury Department would have to pay higher interest rates to attract increasingly wary new buyers of its debt. This would in turn impact the dollar’s global status.

This concern is already materializing: Fitch Ratings downgraded the U.S. credit rating in 2023, citing rising debt and growing budget brinkmanship. As Figure 2 shows, the dollar’s share of global reserves has fallen noticeably in recent decades (from over 70% in 1999 to 58% in 2024) in the same period that U.S. debt as percent of GDP has skyrocketed (from 38% to nearly 100%). It should be noted, however, that the U.S. fiscal situation isn’t the only reason behind the dollar’s declining share of global reserves. Other factors like increasing liquidity of “nontraditional” reserve currencies, the rise of central bank digital currencies, and concern over U.S. sanctions have all contributed. However, rising U.S. debt has been a key factor and will continue to be in the years to come if left unaddressed.

Debt Limit Confrontations

While the growing national debt poses a medium to longer-term threat to the U.S. dollar, a more immediate concern is brinkmanship related to the federal debt limit. The debt limit is set by law and restricts the amount of debt the U.S. government can hold. When the debt limit is reached, Treasury can temporarily draw on accounting maneuvers known as “extraordinary measures” that allow the government to continue standard operations for a limited period of time. Once those measures and the Treasury’s cash reserves run out, the U.S. government would be unable to meet all its financial obligations in full and on time, which BPC has coined the “X Date.”

Defaulting or delaying payments on the federal government’s obligations could set off a catastrophic sequence of events for the economy, including a global recession and an immediate U.S. credit downgrade resulting in increased borrowing costs for individuals and businesses. A sharp rise in the interest rates that the Treasury pays to borrow would further increase the national debt from its already staggeringly high levels. This would severely threaten the dollar’s status as a safe haven currency and its dominant position in world financial markets.

Until now, the threat of default has made Congress ultimately agree on a deal to raise or suspend the debt limit. In recent years, however, numerous eleventh-hour confrontations have made default a real possibility. The closest near-miss was on August 2, 2011, when (after months of deadlocked negotiations) Congress passed the Budget Control Act of 2011, raising the debt ceiling with new fiscal austerity measures, hours before the deadline. Even coming close to a default has its consequences: In 2011, Standard & Poor’s downgraded America’s credit rating after the debt limit impasse, citing political brinkmanship. Analysis from the Federal Reserve also found that the Treasury’s borrowing costs increased by hundreds of millions of dollars in the lead up to the X Date in 2011 and 2013 due to elevated interest rates on Treasury securities.

The Path Forward

America’s worsening fiscal trajectory, combined with repeated brinkmanship relating to the debt limit, will continue to erode faith in our creditworthiness. Even in the absence of a major event like a default, there could be a long-term negative impact on the dollar’s status as a global reserve currency.

Although there are other external factors that could threaten the dollar’s dominant global status in the years to come, the U.S. has direct control over its fiscal trajectory. Congress must address the rapidly growing debt as well as de-risk the debt limit to take the possibility of default off the table. These steps would ensure that global trust in America’s creditworthiness is maintained, which is crucial for the dollar’s dominant role in global finance and consequently U.S. economic strength.

Understanding Reserve Currency: The U.S. Dollar’s Global Impact

What Is a Reserve Currency?

A reserve currency, primarily held by central banks worldwide, is used to facilitate international trade and stabilize economies. Since 1944, the U.S. dollar has played a crucial role as the dominant reserve currency. This article explores its global impact and historical evolution, including key agreements like Bretton Woods, which anchored its status and the shifts that followed Nixon’s gold decoupling.

History of the Reserve Currency

A reserve currency is the currency in which the majority of the world’s international transactions are handled. Historically, they have been the currencies of a series of European colonial powers, including Spain, France and England at various points. These empires often backed their currencies with precious metals, typically gold, in addition to the implicit backing of the state.

Following World War I, the British economy struggled to regain its vigor. Much of the world’s gold flowed from London to New York for safekeeping and speculation in the roaring 1920s U.S. equity bull market. America’s dominant role in World War II further cemented New York as the financial capital of the world, and the dollar as its most important currency. The greenback was formally made the world’s reserve currency in 1944 as a result of the Bretton Woods Agreement, a status the sterling had previously held.

President Richard Nixon abandoned the gold standard in 1971. From that point on, the dollar has been backed not by precious metal, but purely by the full faith and credit of the U.S. government. And since 1971, critics have called for the end of the U.S. dollar as the world’s reserve currency.

The Role and Importance of Reserve Currencies

Holding a reserve currency reduces exchange rate risk because a country doesn’t need to swap its currency for the reserve currency. Since 1944, the U.S. dollar has been the primary reserve currency used by other countries. Foreign nations watch U.S. monetary policy closely to make sure their reserves aren’t hurt by inflation or rising prices.

The U.S. Dollar’s Journey to Becoming the Global Reserve Currency

The post-war emergence of the U.S. as the dominant economic power had enormous implications for the global economy. At one time, U.S. Gross Domestic Product (GDP), which is a measure of the total output of a country, represented 50% of the world’s economic output.
It made sense for the U.S. dollar to become the global reserve currency.  In 1944, under the Bretton Woods Agreement, 44 nations agreed to use the U.S. dollar as an official reserve currency. Since then, other countries pegged their exchange rates to the dollar, which was convertible to gold at the time. The stable, gold-backed dollar helped other countries stabilize their currencies.

Decoupling From Gold: The Shift to Floating Exchange Rates

As the United States continued to flood the markets with paper dollars to finance its escalating war in Vietnam and the Great Society programs, the world grew cautious and began to convert dollar reserves into gold. The run on gold forced President Nixon to decouple the dollar from gold, leading to today’s floating exchange rates. Soon after, the value of gold tripled, and the dollar began its decades-long decline.

Sustaining Trust in the U.S. Dollar As a Reserve Currency

Even with de-dollarization, the U.S. dollar remains the world’s currency reserve. The status is due primarily to the fact that countries accumulated so much of it and that it was still the most stable and liquid form of exchange. Backed by the safest of all paper assets, U.S. Treasuries, the dollar is still the most redeemable currency for facilitating world commerce. For this reason, it’s highly unlikely the U.S. dollar will experience a collapse any time soon.

The euro, introduced in 1999, is the second most commonly held reserve currency in the world. According to the International Monetary Fund (IMF), which is charged with promoting global growth and trade, central banks hold more than $6.7 trillion in dollar reserves versus 2.2 trillion in euros as of Q4 2019.

The Bottom Line

The U.S. dollar continues to dominate as the world’s primary reserve currency due to its stability, liquidity, and the robust backing from U.S. Treasuries. This status was cemented post-World War II through the Bretton Woods Agreement. Though the dollar’s link to gold ended with the Nixon Shock, the currency remains an integral part of global trade and finance.

While alternatives like the euro exist, their hold remains significantly less compared to the dollar. Understanding the U.S. dollar’s historical and ongoing role in international markets helps illuminate why it remains a cornerstone in global economics.

De-dollarization: Is the US dollar losing its dominance?

The U.S. dollar is the world’s primary reserve currency, and it is also the most widely used currency for trade and other international transactions. However, its hegemony has come into question in recent times due to geopolitical and geostrategic shifts. As a result, de-dollarization has increasingly become a substantive topic of discussion among investors, corporates and market participants more broadly.

What are the potential implications of de-dollarization, and how is it playing out in global markets and trade? 

What is de-dollarization? 

In short, de-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback.

“The concept of de-dollarization relates to changes in the structural demand for the dollar that would relate to its status as a reserve currency. This encompasses areas that relate to the longer-term use of the dollar, such as transactional dominance in FX volumes or commodities trade, denomination of liabilities and share in central bank FX reserves,” said Luis Oganes, head of Global Macro Research at J.P. Morgan.

Importantly, this structural shift is distinct from the cyclical demand for the greenback, which is shorter term and has in recent times been driven by U.S. exceptionalism, including the relative outperformance of the U.S. equity market. “The world has become long on the dollar in recent years, but as U.S. exceptionalism erodes, it should be reasonable to expect the overhang in USD longs to diminish as well,” Oganes said. 

What are the causes and implications of de-dollarization? 

There are two main factors that could erode the dollar’s status. The first includes adverse events that undermine the perceived safety and stability of the greenback — and the U.S.’s overall standing as the world’s leading economic, political and military power. For instance, increased polarization in the U.S. could jeopardize its governance, which underpins its role as a global safe haven. Ongoing U.S. tariff policy could also cause investors to lose confidence in American assets.

The second factor involves positive developments outside the U.S. that boost the credibility of alternative currencies — economic and political reforms in China, for example. “A candidate reserve currency must be perceived as safe and stable and must provide a source of liquidity that is sufficient to meet growing global demand,” said Alexander Wise, who covers Long-Term Strategy at J.P. Morgan.

Fundamentally, de-dollarization could shift the balance of power among countries, and this could, in turn, reshape the global economy and markets. The impact would be most acutely felt in the U.S., where de-dollarization would likely lead to a broad depreciation and underperformance of U.S. financial assets versus the rest of the world.

“For U.S. equities, outright and relative returns would be negatively impacted by divestment or reallocation away from U.S. markets and a severe loss in confidence. There would also likely be upward pressure on real yields due to the partial divestment of U.S. fixed income by investors, or the diversification or reduction of international reserve allocations,” Wise said. 

Global trade

The U.S.’s share in global exports and output has declined over the past three decades, while China’s has increased substantially. Nonetheless, the transactional dominance of the dollar is still evident in FX volumes, trade invoicing, cross-border liabilities denomination and foreign currency debt issuance.

In 2022, the greenback dominated 88% of traded FX volumes — close to record highs — while the Chinese yuan (CNY) made up just 7%, according to data from the Bank for International Settlements (BIS).

Likewise, there is little sign of USD erosion in trade invoicing. “The share of USD and EUR has held steady over the past two decades at around 40–50%. While the share of CNY is increasing in China’s cross-border transactions as it moves to conduct bilateral trade in its own currency terms, it is still low from a global standpoint,” Oganes observed.

The dollar has also stoutly maintained its superiority when it comes to cross-border liabilities, where its market share stands at 48%. And in foreign currency debt issuance, its share has remained constant since the global financial crisis, at around 70%. “The daylight from the euro, whose share is at 20%, is even greater on this front,” Oganes added. 

FX reserves

On the other hand, de-dollarization is unfolding in central bank FX reserves, where the share of USD has slid to a two-decade low in tandem with its macro footprint. “However, the dollar share in FX reserves was lower in the early 1990s, so the recent decline to just under 60% is not completely out of the norm,” said Meera Chandan, co-head of Global FX Strategy at J.P. Morgan.

While much of the reallocation of FX reserves has gone to CNY and other currencies, USD and EUR still dominate levels. “The CNY footprint is still very small, even if growing, and its push for bilateral invoicing is likely to keep this trend on the upswing,” Chandan noted.

The main de-dollarization trend in FX reserves, however, pertains to the growing demand for gold. Seen as an alternative to heavily indebted fiat currencies, the share of gold in FX reserves has increased, led by emerging market (EM) central banks — China, Russia and Türkiye have been the largest buyers in the last decade. Overall, while the share of gold in FX reserves in EM is still low at 9%, the figure is more than double the 4% seen a decade ago; the corresponding share for DM countries is much larger at 20%. This increased demand has in turn partly driven the current bull market in gold, with prices forecast to climb toward $4,000/oz by mid-2026.

Bond markets

In a sign of de-dollarization in bond markets, the share of foreign ownership in the U.S. Treasury market has been declining over the last 15 years.

USD assets, principally liquid Treasuries, account for the majority of allocated FX reserves. However, demand for Treasuries has stagnated among foreign official institutions, as the growth of FX reserves has slowed and the USD’s share of reserves has dropped from its recent peak. Similarly, the backdrop for foreign private demand has weakened — as yields have risen across DM government bond markets, Treasuries have become relatively less attractive. While foreign investors remain the largest constituent within the Treasury market, their share of ownership has fallen to 30% as of early 2025 — down from a peak of above 50% during the GFC.

“Although foreign demand has not kept pace with the growth of the Treasury market for more than a decade, we must consider what more aggressive action could mean. Japan is the largest foreign creditor and alone holds more than $1.1 trillion Treasuries, or nearly 4% of the market. Accordingly, any significant foreign selling would be impactful, driving yields higher,” said Jay Barry, head of Global Rates Strategy at J.P. Morgan.

According to estimates by J.P. Morgan Research, each 1-percentage-point decline in foreign holdings relative to GDP (or approximately $300 billion of Treasuries) would result in yields rising by more than 33 basis points (bp). “While this is not our base case, it nonetheless underscores the impact of foreign investment on risk-free rates,” Barry added.

Commodity markets 

De-dollarization is most visible in commodity markets, where the greenback’s influence on pricing has diminished. “Today, a large and growing proportion of energy is being priced in non-dollar-denominated contracts,” said Natasha Kaneva, head of Global Commodities Strategy at J.P. Morgan.

For example, due to Western sanctions, Russian oil products exported eastward and southward are being sold in the local currencies of buyers, or in the currencies of countries Russia perceives as friendly. Among buyers, India, China and Turkey are all either using or seeking alternatives to the dollar. Saudi Arabia is also considering adding yuan-denominated futures contracts in the pricing model of Saudi Arabian oil, though progress has been slow.

Notably, cross-border trade settlement in yuan is gaining ground outside of oil too. Some Indian companies have started paying for Russian coal imports in yuan, even without the involvement of Chinese intermediaries. Bangladesh also recently decided to pay Russia for its 1.4 GW nuclear power plant in yuan.

“The de-dollarization trend in the commodity trade is a boon for countries like India, China, Brazil, Thailand and Indonesia, which can now not only buy oil at a discount, but also pay for it with their own local currencies,” Kaneva noted. “This reduces the need for precautionary reserves of U.S. dollars, U.S. Treasuries and oil, which might in turn free up capital to be deployed in growth-boosting domestic projects.” 

Deposit dollarization in emerging markets 

At the other end of the spectrum, deposit dollarization — where a significant portion of a country’s bank deposits are denominated in the U.S. dollar instead of the local currency — is still evident in many EM countries. “The tendency of EM residents to dollarize in times of stress appears to be correlated across markets,” said Jonny Goulden, head of EM Fixed Income Strategy at J.P. Morgan.

According to J.P. Morgan Research, dollar deposits have grown mostly uninterrupted over the last decade in EM, reaching around $830 billion for a sample set of 18 EM countries (excluding China, Singapore and Hong Kong). “While there are large regional divergences in deposit dollarization across EM, all regions are more dollarized now than they were a decade ago,” Goulden noted. Latin America is the most dollarized region, with an aggregate dollarization rate of 19.1%. EMEA’s rate stands at 15.2%, while Asia (excluding China, Singapore and Hong Kong) has the lowest rate at 9.7%.

China is the exception, as its dollarization rate has been persistently falling since 2017. “This is not surprising, as this was around the time when U.S.–China relations began shifting into their current state, marked by the trade war and growing diplomatic, security and geopolitical tensions,” Goulden said. “This suggests that China, alongside progress on de-dollarizing its own cross-border transactions, has effectively been de-dollarizing the deposits of Chinese residents, adding another dimension to its efforts to separate from U.S. dominance.” 

De-Dollarization: What Would Happen if the Dollar Lost Reserve Currency Status?

One of the more intriguing financial trends that has gained popularity in recent years is the de-dollarization movement. De-dollarization is an effort by a growing number of countries to reduce the role of the U.S. dollar in international trade. Countries like Russia, India, China, Brazil and Malaysia, among others, are seeking to set up trade channels using currencies other than the almighty dollar. With President Donald Trump’s international trade war ramping aggressively, is the reserve status of the U.S. dollar going to be the next domino to fall?

Why the Dollar Is King

There are several factors that have led to the dollar maintaining its international reserve currency status. One is the so-called “petrodollar.” The vast majority of the world’s oil transactions occur in dollars. As the global oil trade amounts to billions of dollars per day and all countries need energy, this creates a great deal of demand for dollars to facilitate these transactions.

While oil is the most obvious example, there’s a broader need for a world unit of exchange. Consider a scenario where a Brazilian farmer sells soybeans to a Japanese condiments company. It’s highly unlikely that the Japanese firm would have Brazil’s currency, the real, on hand to pay the farmer. Similarly, the Brazilian grower is not going to want to accept Japanese yen in exchange for their soybeans. Thus, the logical solution is to use an intermediary to convert yen into dollars, buy the soybeans with dollars and then have the producer convert those dollars into their local currency.

To that point, the Federal Reserve estimates that between 1999 and 2019, the dollar accounted for 96% of international trade transactions in the Americas, 74% in Asia and 79% around the rest of the globe. Globally, banks used dollars for approximately 60% of their nondomestic deposits and loans. And in the foreign exchange market today, the U.S. dollar is on one side of almost 90% of all transactions.

The euro looked like it might have a chance to replace the dollar at the turn of the century. But the 2008 financial crisis and various political and economic shocks in Europe have since diminished the standing of a central European currency as a world standard. Japan has its own issues with a stagnant economy and shrinking population. China is unlikely to become a reserve currency anytime soon given the extreme capital controls that its government places on the use of the yuan.

All other potential candidates are likely too small to be a reserve currency. The Swiss franc, for example, is known as a stable and well-regarded currency. However, the economy it’s tied to, Switzerland, is tiny and would not be able to support the huge capital flows required of an international reserve currency.

Renewed De-dollarization Movement

The latest de-dollarization movement started in 2022 when the U.S. imposed all-encompassing sanctions against Russia following Russia’s invasion of neighboring Ukraine. Various world leaders took umbrage at the idea that the U.S. could freeze their funds due to any sort of diplomatic or military dispute.

In 2025, Trump’s aggressive tariffs and isolationist policies have disrupted U.S. alliances with Europe and other trade partners. Trump’s antagonistic approach to trade policy has ostracized American allies and may encourage more countries to seek ways to reduce their reliance on the dollar.

In addition, inflation is weakening the standing of the dollar on the international stage. Some experts have understandably grown concerned about U.S. debt levels and the impact that debt could have on the dollar in the long term. Rather than paying down its debt over time, the U.S. could instead choose to erode away the value of that debt via inflation. When U.S. inflation is high, savers around the world question the security and stability of the dollar for long-term savings and investments.

Against this backdrop, leaders of countries such as China, India and Brazil have been calling for moves to trade directly with each other in their own currencies while cutting the U.S. dollar out of the equation. This change would incrementally diminish the role and importance of dollars while creating a multipolar financial world where the next tier of economies would have significantly more say in global affairs.

Russia, along with the aforementioned three countries, formed what’s known as BRICS, a group of emerging countries in a loose economic alliance to counter Western influence. The group now also includes South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates.

At the 2024 BRICS Summit, Russian President Vladimir Putin spoke out about the so-called weaponization of the dollar.

“The dollar is being used as a weapon. We really see that this is so. I think that this is a big mistake by those who do this,” Putin said.

He also noted that nearly 95% of trade between Russia and China now takes place in rubles and yuan, bypassing the dollar. BRICS members have even floated the idea of creating a single BRICS currency to use to transact with one another, but there appears to have been little actual progress in creating a functional BRICS currency or payment system at this point.

Is De-Dollarization Coming?

The good news for Americans is that the value of the dollar has held up well in recent years, despite growing U.S. debt and inflation. But while the US Dollar Index is up 1.3% overall in the past five years, it has dropped 8.8% year to date as of June 18.

That recent weakness in the dollar stems from Trump giving investors mixed signals about the dollar’s role as the world’s reserve currency. In 2024, Trump threatened to impose 100% tariffs on any country that opts to trade using alternative currencies. However, Trump has also argued the dollar’s strength in recent years has been “a disaster for our manufacturers” because it increases the cost of American-made goods.

Trump’s aggressive trade policies may be driving the dollar’s 2025 weakness, or it may be that global investors are simply losing faith in the long-term outlook for the U.S. economy.

Fortunately for Americans, there appears to be no viable alternative to the dollar as of yet. While gold has been an effective hedge against inflation, it is unlikely to replace the dollar as a global reserve currency due to challenges with transportation, storage, liquidity and supply. Likewise, Bitcoin and other cryptocurrencies face their own challenges with liquidity, security, scalability and energy consumption (not to mention volatility).

Lucas Kiely, CEO at Future Digital Capital Management, says global de-dollarization is simply unfeasible at this point.

“A complete global shift from USD seems improbable in the near future, despite efforts by China and Russia – two countries known for manipulating their own currencies – to destabilize it,” Kiely says. “Ultimately, where is the alternative?”

Instead of choosing a single alternative currency, central banks around the world have taken a more diversified approach, incorporating currencies of smaller economies such as Australia and Canada.

Philip Alberstat, managing director at DBD Investment Bank, says there are also logistical reasons why the dollar will likely maintain its global reserve currency status for the foreseeable future. Alberstat says it would take decades, not years, for the global economy to transition away from the dollar.

“The institutional relationships and clearing mechanisms supporting the current system represent generations of development,” he says. “Even if viable alternatives existed – which they currently do not – displacing an established reserve currency requires sustained effort over extended periods.”

What to Do if You’re Worried About De-dollarization

Investors concerned about de-dollarization can dial back exposure to U.S.-specific funds like the SPDR S&P 500 ETF Trust (ticker: SPY) and increase their allocation to funds such as the Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard FTSE Emerging Markets ETF (VWO).

Elliot Johnson, CEO of Bitcoin Treasury Corp., also recommends investors diversify into non-correlated assets, such as Bitcoin, real estate, gold and certain commodities.

Investors can also turn to U.S. dollar hedges such as gold via SPDR Gold Shares (GLD) and real estate via funds such as the Vanguard Real Estate ETF (VNQ).

“Whether the dollar retains its dominance or not, the core principle of investment stands: Don’t put all your eggs in one basket,” Johnson says. “And, in an increasingly inflationary world witnessing fast-shifting global power dynamics, diversification has never been more essential.”