Why predictions of a dollar doomsday are wildly premature

Photis Lysandrou

8 May 2025

There is no question that Donald Trump's highly disruptive tariff policies have caused uncertainty to spread to US Treasury bonds, as evidenced by the rise in their yields, and hence to the dollar, as evidenced by the drop in its rate against the euro to a three-year low. But can we draw from these observations the conclusion that the dollar's global dominance is at long last coming to an end? Is it really the case that ‘the dollar's safe status is under threat’ (FT, April 12th) and that we may even be facing the ‘spectre of dollar doomsday’? (FT, April 28th). While at least some of us would wish this to be the case, a sober analysis of the facts suggests a very different conclusion.

The key distinction is between the price/yield aspect of the dollar's backing mass of treasuries and its quantum aspect. Of the current $29 trillion stock of US treasuries, foreign investors hold about $8.8 trillion. A substantial proportion of this amount is held by foreign central banks for exchange rate management purposes, the result being that the dollar continues to comprise nearly 60% of all globally allocated reserves, while the euro accounts for a further 20% and an assortment of other currencies account for the remaining 20%. These differences in currencies' percentage contributions to central bank reserves are even more significant when set in the context of the steep volume growth of these reserves over the past three decades: the dollar accounts for 60% of allocated reserves, but these now total around $13 trillion, which is an eight-fold increase of the $1.7 trillion figure for 1995.

This growth in reserves has closely paralleled that of the world's equity and bond stocks: thus, where in 1980 the aggregate nominal value of these stocks was on a par with that for world GDP ($11 trillion), by 2000 it was two and a half times world GDP ($80 trillion versus $33 trillion), a ratio that was replicated in 2020 ($203.2 trillion versus $87.7 trillion). Just as striking as the degree to which the world's financial securities markets now dominate the world's product markets on which they rest, is the degree to which the US dominates the world's supply of equity and debt securities: it is estimated that of the combined amount of $272 trillion outstanding at end-2024, the US on its own accounted for about 42% of this amount, a figure roughly on a par with the 43% share of all of the other advanced market economies but also nearly three times the 15% share of all of the world's emerging market economies, those of China and of the other member countries of the BRICS association included.

The world’s pension funds and other institutional investors welcome the growth of securities stocks because it means a growth in the supply of portable stores of value, but the flip side of this development is that it provides hedge funds and other speculative vehicles with massive financial fire power when targeting particular national currencies that are perceived to be vulnerable. Europe felt the scale of pressure that can be exerted on exchange rates in the summer of 1992 with the EMS crisis, but if there was then any lingering doubt as to whether this type of pressure was likely to be temporary rather than permanent in nature, that doubt was ruthlessly removed by the Asian currency crisis that broke out in the summer of 1997.

To counter the negative effects of any sudden surges in investment flows, central banks need to hold the bulk of their reserves in assets that combine three attributes regarding their value storage capacity : safety (their stored value must hold firm up to the point of sale); liquidity(they can be sold quickly without any adverse impact on their price and hence stored value quantity); and, what is also most critical, scale (they must be capable of holding such substantial quantities of value as can match those carried in international investment flows). Only US treasuries meet all three of these criteria. Other national government securities combine safety and liquidity but have comparatively little value storage capacity. Crypto currencies do potentially have large value storage capacities but lack safety because their prices can fluctuate wildly with any shifts in market sentiment. Gold combines safety with liquidity but its quantity is materially constrained. Cash combines safety and liquidity, but its quantity is limited by inflation risk constraints. The list goes on.

In the absence of adequate alternative supplies of safe assets that can reliably serve reserve management purposes, countries must necessarily hold vast amounts of US treasuries and nowhere is this necessity more acute than in South East Asia. The top two foreign holders of US treasuries are Japan and China, with holdings of $1.1trillion and $0.78 trillion respectively, but if we add the sums held by another four S.E Asian official authorities (Taiwan, Hong Kong, Singapore and South Korea) the combined total rises to $2.8 trillion, which is over a quarter of all foreign held treasuries. Given the traumatic events of the summer of 1997 when virtually all of the major Asian currencies came under massive speculative attacks, are we really to believe that Japan and China and the other Asian countries are to going off-load their treasury holdings on the scale necessary to hurting the dollar? Will they risk exposing their currencies to the same type of speculative attacks as occurred in 1997? This is highly unlikely.

The harsh reality is that there will be no end to dollar dominance unless and until there exists a rival currency that is backed by an equivalent sized mass of securities. As things currently stand, the euro is the only currency that has the potential to meet this criterion at some point down the line. The realisation of this potential is not going to be easy, not least because of the divergent positions regarding government debt levels taken by the eurozone's member countries. Germany's government has at long last started to relax its stance on its own public debt, but this alone is not enough. If the euro is to acquire a safe haven status on a par with that of the dollar, a key requirement is that the European Central Bank be allowed to issue bonds that are jointly backed by all of the eurozone member governments.

The call for such a policy has been made several times in the past, most notably by France and backed by the Southern European euro member states, but that call was always blocked by Germany backed by other Northern European euro member states. It is just possible that this block may now finally be removed, with Donald Trump’s disruptive policies proving to be the catalyst for this removal. Even so, it will take a while for the euro to acquire enough financial muscle to match that of the dollar in the global financial domain and, until then, this project is not going to be helped by wildly premature predictions of an imminent end to dollar dominance.

Photis Lysandrou is Research Professor in the City University Political Economy Research Centre (CITYPERC), City and St Georges University of London.