The Dollar's Exorbitant Privilege

Imagine being able to borrow almost unlimited amounts of money in a currency you control — and then using that same currency to purchase goods from the rest of the world.

That is the extraordinary privilege America enjoys.

Oil, metals, agricultural commodities and countless international contracts are priced in US dollars. Companies borrow in dollars even when neither the borrower nor the lender is American. Central banks hold dollars to defend their own currencies and meet international obligations. When financial markets become frightened, investors frequently respond by buying more dollars and US government bonds — even when the crisis originated in America.

This privilege allows the United States to borrow more cheaply, run larger deficits and finance its military and geopolitical commitments on terms unavailable to almost any other country.

It has often been called America's "exorbitant privilege". But privilege comes with responsibility.

The world accepts dollars because it trusts — or has historically trusted — the United States to maintain relatively stable institutions, open financial markets, dependable property rights and the rule of law. It also knows that US Treasury securities can be bought and sold in enormous quantities at almost any time.

America is now testing that trust.

Its national debt continues to grow. Large fiscal deficits have become normal during good economic times as well as bad. Successive administrations have discovered that borrowing and creating money are politically easier than increasing taxes or reducing expenditure.

The question is not whether the dollar will suddenly disappear. It will not.

The more important question is whether America can gradually misuse its privilege until the rest of the world decides that it must construct alternatives.

What is a reserve currency?

A reserve currency is held in significant quantities by central banks and monetary authorities as part of their foreign-exchange reserves.

Countries keep reserves to pay for imports, service foreign debts, support their own currencies during a crisis and reassure investors that their international obligations can be met.

However, the dollar's importance extends considerably beyond official central-bank reserves.

A genuine international currency must perform three functions. It must be a store of value in which governments, companies and individuals are prepared to preserve wealth. It must be a medium of exchange used to settle transactions. And it must be a unit of account in which goods, services, debts and contracts are priced.

The dollar dominates across all three.

In 2025, it represented approximately 57% of official global foreign-exchange reserves. The euro accounted for roughly 20%, while the Chinese renminbi represented only around 2%.^[1]

The dollar's share has declined from approximately 72% in 2001. That matters, but it is not evidence of imminent collapse. Much of the decline benefited a collection of smaller currencies, including the Canadian and Australian dollars, rather than producing a decisive move into one obvious successor.

The dollar's position in international trade is even more impressive than its share of official reserves.

There is no comprehensive real-time database recording the currency used in every trade transaction. Nevertheless, Federal Reserve research found that the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region and 79% across the rest of the world outside Europe. Europe is the main exception, where the euro dominates regional trade.

Separately, approximately half of international payments transmitted through the SWIFT system are denominated in dollars.^[2]

This means that a remarkably large proportion of international commerce is priced or settled in dollars even when neither the buyer nor the seller is American.

Once a commodity, shipping contract or supply chain is priced in dollars, the businesses involved need dollar bank accounts, dollar credit and dollar hedging instruments. Trade creates demand for dollar finance, which reinforces demand for dollar reserves and US Treasury securities.

This is how the system feeds itself.

The global foreign-exchange market handled approximately $9.6 trillion per day in April 2025. The dollar was involved in the overwhelming majority of those transactions.^[3]

Reserve status is not awarded automatically to the country with the fastest-growing economy. China may be an industrial powerhouse, but would you place your country's national savings in a currency you cannot freely convert or remove from the country?

A reserve currency rests upon trade, banking, debt markets, legal protections, military and political power — and accumulated trust.

Before the dollar

The dollar was not always the world's leading currency.

During parts of the seventeenth and eighteenth centuries, the Dutch guilder played an important international role. Amsterdam became a leading centre for trade, banking and capital. The guilder's importance rested upon the commercial reach of the Dutch Republic and the sophistication of its financial institutions.

Sterling subsequently became the dominant international currency during the nineteenth century.

Britain sat at the centre of an extensive trading system. London was the world's leading financial centre. British banks financed international commerce, while the Royal Navy protected many of the routes upon which that commerce depended. Sterling was convertible into gold, and the British Empire and wider Sterling Area reinforced its use.

There is a lesson here. Governments do not create successful reserve currencies merely by announcing them. They emerge from economic scale, trade, financial innovation, open markets, geopolitical strength and confidence in institutions.

Britain's relative economic decline, the cost of the First World War and the expansion of American industry gradually shifted the balance.

The United States had overtaken Britain economically before the First World War, but financial habits change more slowly than economic league tables. Sterling retained international importance because trade, banking and contractual relationships were already organised around it.

The dollar began overtaking sterling in trade finance during the 1920s. Evidence suggests it became the leading reserve currency by the end of that decade — not simply after the Second World War, as is often claimed.^[4]

The Bretton Woods agreement of 1944 then formalised the dollar's central position. Participating currencies were linked to the dollar, while the dollar was convertible into gold at $35 an ounce.

By then, America possessed the world's most powerful economy, a substantial proportion of its gold and an industrial base strengthened by the war. Britain emerged victorious but financially exhausted.

President Nixon ended the dollar's convertibility into gold in 1971. The world gradually moved towards floating exchange rates, but the dollar remained dominant.

That is one of the most revealing facts in monetary history.

The dollar survived the removal of its gold backing because its real foundations were much broader: America's economy, financial markets, military power, alliances and the absence of a convincing alternative.

What does America receive in return?

Reserve-currency status provides the United States with several enormous advantages.

Foreign central banks, institutions and investors require dollar assets. Much of that demand is satisfied through US Treasury securities. In the first quarter of 2025, foreign investors held approximately $9 trillion — or 32% — of marketable US Treasury debt.^[5]

This demand helps America borrow more cheaply than would otherwise be possible.

The United States issues its debts in its own currency. It does not normally need to earn or accumulate a foreign currency before meeting international obligations. Countries that borrow heavily in somebody else's currency do not enjoy this protection.

American companies benefit too. They can borrow internationally in dollars, invoice exports in their home currency and avoid some of the exchange-rate risks faced by foreign competitors.

America also obtains extraordinary geopolitical power.

Dollar payments often pass through American banks or financial infrastructure. The US authorities can restrict access to banks, businesses, individuals and governments, even when the underlying commercial activity takes place outside America.

This makes financial sanctions an extremely powerful weapon.

But every weapon loses some of its effectiveness when used too frequently. Every country subjected to American sanctions has an incentive to find a way around the dollar system.

The Triffin dilemma

There is an uncomfortable contradiction at the centre of the system.

The world needs a growing supply of reserve assets to support expanding trade and finance. America must therefore supply dollars and dollar assets to the rest of the world, often by running external deficits.

But the larger and more persistent those deficits become, the more they may eventually undermine confidence in the currency.

This is known as the Triffin dilemma, named after the Belgian-American economist Robert Triffin.

Under Bretton Woods, the problem was obvious. The world required more dollars, but those dollars were theoretically convertible into a finite American stock of gold. Eventually, foreign dollar claims became far larger than the quantity of gold America was willing or able to supply at the official price.

Nixon ended the convertibility promise in 1971, but he did not eliminate the underlying conflict.

Today, Treasury securities have largely replaced gold as the principal reserve asset. The world wants enormous quantities of safe, liquid dollar investments. America supplies them by issuing debt.

This produces a remarkable paradox. Rising US government debt can reinforce the dollar's reserve role because it creates more Treasury securities for the world to own. But if the debt rises far enough to destroy confidence in American fiscal discipline, the same process could eventually weaken the dollar.^[6]

America must issue enough dollar assets to support the world's financial system — but not so many that the world stops trusting them.

Is the dollar being debased?

The United States is frequently accused of printing money. The phrase is directionally useful but requires some explanation.

Government expenditure is financed primarily through taxation and borrowing. The Treasury issues bonds, while the Federal Reserve controls the monetary base and conducts monetary policy.

During quantitative easing, the Federal Reserve creates reserves and uses them to purchase government bonds and other securities. This does not mean every dollar of government spending is literally printed. But it makes the financial system more liquid and can make government debt easier to finance. Under certain conditions, it can also contribute to inflation and rising asset prices.

Currency debasement does not necessarily mean that the dollar collapses against other currencies.

If America, Europe, Britain and Japan are all expanding their money supplies and debts, the dollar might remain comparatively strong against the euro, pound and yen while all of them lose purchasing power against houses, shares, gold and other scarce assets.

This is the foundation of the monetary argument for Bitcoin.

Bitcoin's supply is limited by its protocol to 21 million coins. Governments cannot create additional Bitcoin to finance deficits, rescue banks or satisfy voters.

The attraction is understandable. But limited supply alone does not create a reserve currency.

A reserve asset also needs deep markets, dependable liquidity, secure custody, legal acceptance and the ability to transact in enormous quantities during a crisis. Bitcoin remains volatile and is not a liability of a government or central bank.

Bitcoin may become an increasingly important store of value. That does not mean central banks will soon use it for everyday currency intervention and international liquidity.

Could the Chinese renminbi replace the dollar?

The Chinese currency is formally called the renminbi, meaning "the people's currency". The yuan is its principal unit, just as sterling is the currency and the pound is its unit. In ordinary conversation the two terms are frequently used interchangeably.

China appears to possess several ingredients needed for an important international currency.

It is the world's second-largest economy, an enormous manufacturer, a major commodity importer and the leading trading partner for numerous countries.

China has encouraged greater international use of its currency. It has established swap arrangements with foreign central banks, promoted trade settlement in renminbi, developed its Cross-Border Interbank Payment System and allowed greater foreign participation in Chinese bond markets.

This has produced progress. The renminbi is increasingly used in transactions involving China and accounted for about 8% of global trade finance during the third quarter of 2025.

But less than 3% of global trade payments were settled in renminbi, and only approximately 2% of official foreign-exchange reserves were held in it.^[7]

China's economic importance has not translated into an equivalent monetary role.

The greatest obstacle is convertibility.

A currency is fully convertible when investors can exchange it freely for other currencies and move capital across borders. China permits substantial freedom for payments associated with ordinary trade, but controls remain over many capital transactions.

Beijing regulates the movement of money because opening the capital account would reduce its control over domestic credit, interest rates and the exchange rate. It could also allow Chinese households and businesses to move vast amounts of savings abroad during periods of uncertainty.

That is understandable from the perspective of the Chinese Communist Party. It is a serious weakness from the perspective of a foreign central bank.

A reserve manager must know that an asset can be purchased, sold, converted and removed whenever necessary. If access ultimately depends upon administrative approval, it cannot provide the same confidence as a freely traded US Treasury bond.

The renminbi is not allowed to float completely freely either. Its exchange rate is managed by the People's Bank of China through a policy framework and trading band. Market forces matter, but the state retains considerable control over the price.

China therefore faces a difficult choice.

To create a genuine rival to the dollar, it would need to surrender some control over capital flows, interest rates and the exchange rate. It would need deeper, more transparent financial markets and stronger legal protection for foreign investors.

Those reforms would make the renminbi more credible internationally. They would also reduce the Communist Party's control over China's domestic financial system.

This is why the renminbi can become much more important without replacing the dollar.

China may create a substantial renminbi trading network among countries that trade heavily with it or wish to reduce their dollar exposure. It may dominate parts of Asian and commodity trade.

But there is an enormous difference between using renminbi to buy Chinese goods and trusting China with your country's national savings.

The euro: the most credible conventional competitor

The euro is currently the dollar's most credible conventional competitor.

It is freely convertible, supported by a large economy and used across an important trading bloc. Europe possesses sophisticated financial markets, established legal systems and an independent central bank. The euro accounts for approximately 20% of global foreign-exchange reserves and a similar proportion across several measures of international currency use.^[8]

The old criticism was that Europe had a common currency but no common debt.

That is no longer entirely true.

The European Commission now issues EU-Bonds and shorter-term EU-Bills in the name of the European Union. The programme expanded substantially to finance the SURE employment-support programme during the pandemic and, above all, NextGenerationEU.

The Commission expects to have raised as much as €637 billion for NextGenerationEU by the end of 2026. Its total permitted programme envelope was €806.9 billion at 2021 prices.^[9]

In 2026 alone, the Commission planned €180 billion of long-term EU-Bond issuance.^[10]

These are real securities, not accounting entries.

The European Commission issues them through syndicated transactions managed by banks and through regular auctions. Bonds are available across benchmark maturities ranging from three to 30 years. Existing bonds can be reopened — or "tapped" — to increase the amount outstanding and improve liquidity.

An EU Primary Dealer Network helps place the securities and supports trading after issuance. Eligible EU securities can also be used in repurchase transactions, allowing investors to borrow cash against them. They consequently trade in secondary markets in broadly the same manner as national government bonds.

Who ultimately stands behind them?

The European Union budget backs the borrowing.

Most EU budget revenue comes from member-state contributions calculated according to gross national income. The budget also receives customs duties, VAT-based contributions and a levy connected to non-recycled plastic packaging.

For NextGenerationEU, loans made to individual countries are due to be repaid by those borrowing states. The portion distributed as grants is to be repaid through the EU budget between 2028 and 2058.

The EU also maintains budgetary "headroom": the difference between the maximum resources it is legally able to call from member states and the amount required for normal expenditure. This headroom supports the EU's credit standing and its ability to meet its obligations.^[11]

EU debt is therefore backed by the EU budget and, behind that, the revenue and contribution capacity of its member states. But this is not exactly the same as a single sovereign government possessing unrestricted national taxation powers.

This distinction matters.

EU debt has become a serious market, but it remains far smaller than the US Treasury market. The Federal Reserve estimated that jointly backed EU debt amounted to approximately $700 billion by May 2025, compared with more than $28 trillion of US Treasuries then outstanding.^[12]

The Treasury market has since grown to around $30 trillion. EU bonds are also less liquid than German or French government bonds, according to the European Central Bank.^[13]

Europe therefore has common debt, but not yet a common debt market of sufficient scale, liquidity and permanence to rival US Treasuries.

There is also a political question. NextGenerationEU was described as a temporary response to an exceptional pandemic. Will common issuance become a permanent part of Europe's financial architecture, perhaps to finance defence, energy infrastructure and industrial development? Or will member states resist what they regard as a transfer of fiscal authority to Brussels?

If Europe created a much larger, permanent and liquid pool of commonly backed debt, completed its capital-markets union and improved its economic growth, the euro could become a much stronger competitor to the dollar.

The foundations now exist. Europe has not yet decided how far it is prepared to build upon them.

What about gold?

Gold is not a currency issued by a country, but it is an important competitor for reserve allocations.

It carries no default risk and cannot be created by a central bank. If it is stored inside a country's own borders, it is also difficult for a foreign power to freeze electronically.

These characteristics have become more attractive since Western governments froze a substantial part of Russia's foreign reserves following its invasion of Ukraine.

The sanctions demonstrated something important: a reserve is only completely available when the institutions controlling its custody and payment system permit it to be used.

Some governments consequently have a stronger incentive to own physical gold.

Central banks have accumulated gold rapidly, and its share of global reserve assets has increased considerably when measured at market prices.^[14]

Gold is not, however, a complete replacement for the dollar. It does not provide the same payment infrastructure, pays no interest and can be cumbersome to transport or mobilise.

It is more likely to absorb part of the diversification away from the dollar than to replace the dollar as the operating system of global finance.

Could the BRICS create a reserve currency?

There is frequent discussion of a BRICS currency backed by gold, commodities or a basket of member currencies.

The political attraction is obvious. China, Russia, India, Brazil and other participating countries would like to reduce their exposure to American monetary policy and sanctions.

The practical difficulties are formidable.

A shared currency requires agreement over governance, issuance, settlement and responsibility during a crisis. It requires participants to trust one another's statistics, institutions and political intentions.

China and India have significant strategic differences. Member economies operate very different exchange-rate and financial systems. Several maintain capital controls.

A commodity-backed currency would also have to specify who stores the commodities, who verifies them, how redemption works and which institution supplies liquidity during a financial panic.

The euro demonstrates the difficulty of creating a currency among countries with broadly similar political systems and decades of institutional cooperation. A BRICS reserve currency would begin with considerably less integration.

BRICS countries can conduct more trade in their own currencies and construct alternative payment arrangements. That is entirely plausible.

It is not the same as creating an asset in which central banks will confidently place trillions of dollars of national reserves.

Sanctions: power that can weaken itself

Dollar dominance gives America extraordinary sanctions power.

Because so much international trade and finance passes through the dollar system, the US can restrict access to banks, companies, individuals and governments even when the underlying transaction occurs elsewhere.

This is one of the greatest strategic benefits of reserve-currency status.

But every use of that power encourages targeted countries — and governments that fear they might one day be targeted — to develop alternatives.

The freezing of Russian reserves was justified by Western governments as a response to aggression. Nevertheless, it demonstrated that sovereign assets could become inaccessible through political decisions.

So far, there has been no dramatic flight from the dollar. Its share of official foreign-exchange reserves remained around 57–58% following the sanctions.^[15]

But the process may be gradual. Countries do not need to abandon the dollar. They can hold slightly more gold, conduct more bilateral trade in local currencies and construct alternative payment systems.

The risk is not necessarily one dramatic replacement. It is steady fragmentation.

Stablecoins may strengthen the dollar

Digital currencies are usually presented as a threat to established money, but dollar-backed stablecoins may reinforce the dollar.

A stablecoin designed to maintain a value of one dollar commonly holds reserves in cash, deposits or short-term Treasury securities. It allows users to transfer a digital representation of the dollar through blockchain-based systems.

For people living in countries with unstable currencies or restricted banking systems, stablecoins can provide easier access to dollar savings and payments.

If stablecoins expand, their issuers may become increasingly important buyers of short-term US government debt. Digital technology could therefore extend the dollar's reach rather than replace it.

The future contest may not be between the dollar and an entirely new digital currency. It may be between digital versions of existing currencies — with the dollar carrying its enormous network advantages into the new system.

What are repeated debt-ceiling confrontations?

The United States has a statutory debt limit, commonly called the debt ceiling. It establishes the maximum amount the Treasury is legally permitted to borrow.

The debt ceiling does not approve new government expenditure.

Congress and the President have already approved spending and taxation through separate legislation. If expenditure exceeds revenue, the Treasury must borrow the difference. Raising the debt ceiling merely allows it to obtain the money required to meet those existing commitments — including interest, military salaries, Social Security, Medicare and tax refunds.^[16]

This creates an extraordinary situation.

Congress can approve expenditure or reduce taxes and then subsequently threaten to prevent the Treasury from borrowing the money required to fulfil those same decisions.

When the limit is reached, the Treasury uses what are called "extraordinary measures". These include temporarily suspending certain investments in government retirement and benefit funds to create additional borrowing capacity.

Eventually those measures run out. If Congress still refuses to raise or suspend the ceiling, the Government can no longer pay all its obligations on time. It must delay payments, default on debt, or both.

America has approached this point repeatedly, including serious confrontations in 2011, 2013, 2021, 2023 and 2025.

Politicians have used the deadline as leverage in wider arguments about expenditure, taxation and the size of government. Agreements have eventually been reached, but sometimes only when the Treasury was moving dangerously close to exhausting its available cash.

Even without an actual default, this behaviour has consequences. The US Government Accountability Office found that debt-limit confrontations between 2011 and 2023 disrupted markets and increased borrowing costs for taxpayers.^[17]

That is what "repeated debt-ceiling confrontations" means — and it is an entirely self-inflicted threat to America's credibility.

The real threat comes from America

Every obvious competitor to the dollar has serious weaknesses.

The renminbi is not freely convertible and remains subject to capital controls and political direction. The euro has substantial common EU debt but still lacks a unified market comparable in scale and liquidity with US Treasuries. Gold is an excellent reserve asset but an inefficient everyday payment system. Bitcoin is scarce but volatile. A BRICS currency lacks the common institutions required to make it credible.

This could encourage American complacency.

The absence of an immediate successor does not guarantee permanent dollar dominance.

Reserve currencies depend upon confidence. That confidence can be damaged gradually through inflation, uncontrolled borrowing, political interference with the Federal Reserve, attacks upon property rights, unnecessary debt-ceiling crises or excessive use of financial sanctions.

Every additional Treasury security must ultimately find a buyer at an acceptable interest rate.

If investors demand higher yields, the Government's interest bill rises. This increases the deficit and requires still more borrowing.

The Federal Reserve may then face pressure to keep government borrowing costs manageable even when inflation remains too high. At that point, fiscal and monetary policy become uncomfortably intertwined.

That is where financial repression, fiscal dominance and currency debasement stop being theoretical concerns.

A privilege that must continually be earned

The dollar is unlikely to be replaced by a single rival in the immediate future.

A more plausible outcome is a gradually more fragmented system. The dollar remains dominant, but the euro, renminbi, gold and smaller currencies acquire larger roles in particular regions and transactions.

The Chinese renminbi will become more important because China is too important for it not to. But until Beijing accepts fuller convertibility, greater exchange-rate flexibility, open markets and stronger protections for foreign capital, it cannot offer what a genuine global reserve currency requires.

The euro already possesses many of these qualities. The development of EU debt has corrected an important weakness, but the market is not yet large, liquid or permanent enough to rival US Treasuries. Whether it becomes so is ultimately a political decision for Europe.

Gold will continue to benefit from concern over sanctions, debt and debasement. Bitcoin and stablecoins will introduce new alternatives, although stablecoins may spread the dollar more widely.

America's greatest protection is the weakness of its competitors.

Its greatest danger is believing that this gives it permission to behave irresponsibly.

The dollar became dominant because America built the world's largest economy, deepest financial markets and most powerful network of political and military alliances. It also developed a reputation — never perfect, but comparatively strong — for honouring contracts, protecting property and permitting capital to move freely.

Reserve-currency status is not a birthright. It is accumulated trust. America can continue to enjoy its exorbitant privilege — but only if it remembers the responsibility that made the privilege possible.