Breaking Up is Hard to Do

It'll Take More than Trump's Trade War to Break the World's Affection for Dollars

This week’s episode of Macro Musings features Paul Blustein, veteran economic journalist and author of several acclaimed books on global finance. Paul joined me to discuss his latest work, King Dollar: The Past and Future of the World’s Dominant Currency. We explore the historical rise of the dollar, its enduring global influence, the strategic use of financial sanctions, and today’s challenges to dollar dominance, including the controversial Mar-a-Lago Accord proposal and Trump’s trade war. It’s a wide-ranging conversation about the role of the dollar in the global economy and how that role might be evolving.

But beyond the economics, this episode was deeply personal for me.

Having Paul on the show was a full-circle moment. Back when I was finishing grad school, I picked up his book The Chastening, a riveting account of the Asian Financial Crisis and the inner workings of the IMF. That book not only expanded my view of international macro, but it directly helped me land my first job at the U.S. Treasury Department. In my Treasury interview, I was asked about international crises and IMF programs, and the insights I had gained from The Chastening helped me through the interview. I made the cut that year and was only one of two Ph.D. students hired to work in International Affairs at Treasury. That job was a springboard for my career: it introduced me to John Taylor and other people, opened up other opportunities, and ultimately helped pave the way to the work I do now, including this podcast.

So it was really special for me to welcome Paul to Macro Musings. His storytelling helped launch my career and now he is a guest on my podcast telling more stories to the listeners. In the photo below, he is signing his books that I brought to the studio, including the one that really connects us—The Chastening. I feel blessed to have crossed paths with Paul in these different ways.

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Is King Dollar Being Dethroned?

As mentioned above, one of the topics Paul Blustein and I cover in the podcast is the growing concern over threats to dollar dominance. In this newsletter, I want to continue that conversation by addressing recent claims that Trump’s trade war has kicked off the dollar’s decline. Some observers point to the sharp swings in Treasury yields and the dollar index during the first two weeks of April as evidence that the U.S. dollar’s role as the de facto global reserve currency is looking increasingly uncertain, that the dollar’s days of dominance may be numbered, that there are doubts about the U.S. safe haven status, and that there are dark days ahead for the less mighty dollar.

These critics argue that the dollar’s dominance is rooted in more than just the size of the U.S. economy and the depth of its capital markets—it also depends on trust. Trust in sound economic policymaking, the rule of law, strong alliances, and a stable geopolitical posture. They warn that Trump is undermining these foundations through erratic trade policies, tariffs on allies, and a disregard for global norms. These developments, in turn, are eroding confidence in the dollar and accelerating efforts by other nations to find alternatives.

While there is some truth and intuitive appeal to these arguments—especially amid rising geopolitical tensions—they ultimately miss the mark. They underestimate the extraordinary scale, depth, and embeddedness of the dollar-based system, and gloss over the immense hurdles any rival currency would face in trying to replicate it. The network effects and balance sheet capacity required to meaningfully challenge the dollar are so vast that such a shift is not just unlikely, it is borderline implausible in any foreseeable timeframe. It would take far more than a chaotic and ill-conceived trade war to dethrone the dollar.

In the remainder of this post, I will document this structural reality. But before doing that, it is worth noting that the very development that motivated these concerns—the big swings in Treasury yields and the dollar index—have settled down. Treasury yields and the dollar index are now at values within the range seen over the past few years.* That Treasury yields and the dollar index have settled down into normal ranges strongly suggest that investors’ unease with U.S. economic policy, which triggered the initial disruption, has run up against the reality of dollar dominance.

A Walk in the Woods with Mark Carney’s SHC Proposal

To illustrate the structural realities of the global financial system, I want to begin by telling a story about a conversation I had while walking in the woods of Wyoming in 2019. The hike was part of the Kansas City Fed’s economic symposium held at Jackson Hole and it followed a provocative presentation by then Bank of England Governor Mark Carney. In his talk, Carney proposed a synthetic hegemonic currency (SHC) as a way to circumvent the challenges of the global dollar system. The proposal was short on details, but the basic idea was that the SHC would be a synthetic asset derived from CBDCs issued by central banks. It would have to be scaled up to compete with the dollar in trade invoicing, reserve management, cross border payments, and as a safe asset.

So there I was on the hike in the Wyoming woods surrounded by economists and central bankers. I happened to run into a very prominent economist—who will remain unnamed—who asked me what I thought of the Carney speech. I said “I don’t know, what do you think?” This economist proceeded to tell me that it was one of the most impractical ideas ever proposed at the conference. This economist explaied that the SHC would need to scale up to $20 trillion or more in assets to meaningfully compete with the dollar. And there simply no way to scale up that much. Where would the global economy find that balance sheet capacity and willingness to issue such a large amount of assets? Without the scale and credibility to match the dollar’s footprint, the SHC was at best an interesting thought experiment.

That hike conversation stuck with me, and later I found academic support for this skepticism in a paper by Zhiguo He, Arvind Krishnamurthy, and Konstantin Milbradt titled What Makes US Government Bonds Safe Assets? The authors argue that the safety and dominance of U.S. Treasuries aren’t simply a reflection of economic fundamentals like debt-to-GDP ratios—they’re the outcome of scale, liquidity, and a powerful coordination equilibrium among global investors.

In their framework, what makes an asset “safe” is that everyone believes it will be safe, and that shared belief becomes self-fulfilling when investors coordinate their portfolios around it. Crucially, the paper shows how this dynamic creates a kind of path dependency: once a country achieves safe asset status at scale, it becomes very hard to dislodge, because no other issuer can match the combination of credibility, capacity, and market infrastructure. In their words, investors have “nowhere else to go.” And that’s the core challenge for the SHC or any aspiring rival to the dollar—not just building a better idea on paper, but scaling it to a point where it can overcome deeply entrenched global habits, institutional structures, and network effects.

This is also why claims that Trump’s erratic trade war could end dollar dominance ring hollow. It would take far more than political turbulence to unwind a system so deeply embedded and globally entrenched. The evidence for these claims is considered next.

Why It’s Hard to Run on King Dollar: The Evidence

So far, I have claimed that scale and reach of the global dollar system make it really hard to break. Evidence for this claim can be seen in foreign exchange markets, trade invoicing, cross-border bank loans, international debt securities, and foreign exchange reserves. See Steven Kamin and Mark Sobel for a recent review of this evidence.

What I want to illustrate here is the dollar’s dominance in global credit markets, using BIS data on global liquidity. The data show that total U.S. dollar credit to non-bank borrowers—both inside and outside the United States—vastly exceeds credit denominated in other major currencies like the euro and yen, as seen in the figure below. Not only does global dollar credit overshadow its rivals in scale, but it continues to grow faster than they do, even as the U.S. economy’s share of global GDP declines. It’s a vivid illustration of just how deeply entrenched the dollar’s position is and how path dependencies in global finance tend to reinforce themselves over time.

But the story gets even more compelling when we shift from issuance to ownership. By combining U.S. Financial Accounts data on credit assets with BIS figures on international debt securities we see that a large and growing share of these dollar-denominated credit assets is held outside the United States. As the chart below reveals, foreign holdings of liquid U.S. dollar credit assets now total nearly $38 trillion, spanning everything from Treasuries and deposits to corporate bonds and financial derivatives. These holdings represent the backbone of global portfolio allocations, collateral chains, and payment systems.

For those interested, the chart below shows the breakdown of the dollar credit assets held by foreigners as reported in the U.S. Financial Accounts data. The sum of the parts in the chart below equals the blue area in the chart above.

So what’s the takeaway? While there may be reallocations across different types of dollar credit assets—say, out of Treasuries and into repos, or from agency bonds into deposits—the sheer scale of the global dollar ecosystem makes a wholesale run on the system highly improbable. There is, quite simply, nowhere else to go. No alternative currency-based credit system comes close to offering the same liquidity, depth, and institutional trust. Until such a rival emerges at scale—which seems unlikely in the foreseeable future—the dollar’s dominance is not just durable; it is structurally anchored by its vast global footprint.

Conclusion

King Dollar, in short, remains firmly on the throne. Not because of American exceptionalism per se, but because of the immense scaffolding of institutions, balance sheets, and global behaviors that support it. From its dominance in global credit markets to its deep integration into cross-border finance, the dollar’s role is not something that can be unseated by a single political moment or policy shift, even if it is chaotic and unsettling. Claims of its imminent demise overlook the sheer complexity and scale of what would be required to replace it. While the system is not immune to change, any transition away from the dollar would probably be evolutionary, not revolutionary—and for now, the rest of the world still has nowhere else to go.

*The U.S. dollar index is still about 9 percent higher than its lows in 2021 and about 20 percent higher than its value prior to its big surge in 2015. If investors were truly bailing on the global dollar system, one would expect the dollar might return to these lower values.

Update

I see that Mark Sobel shares my view as reported in this FT article: