2025 Grey Swan – Dollar Loses Its Dominant Reserve Status
- By Bilal Hafeez and Liang Ding
This article is part of Macro Hive’s 2025 Grey Swan series, where we let our imaginations loose to try and predict low-probability, high-impact events that almost no one expects. You can read the full list here.
Dollar Dominance in Decline?
The US dollar has been the dominant reserve currency held by central banks worldwide since World War Two (WW2). But this could all change in 2025, when the dollar could tumble below 50% of central banks’ FX reserves. Here is why.
Since WW2, the US built an international financial system that placed the dollar at the centre of world trade. The system included organisations like the World Bank and the IMF. On trade, the US promoted organisations like GATT, later renamed WTO. Implicit within this was that other countries could develop their economies through trading with the US. This started with the war-torn European and Japanese economies and later the East Asian economies, including China. These naturally incentivised countries to trade in dollars and hold a disproportionate number of dollars in FX reserves.
President Donald Trump’s arrival in 2016 changed all that. No longer would international organisations be the forum to promote trade. Instead, it would be every country for themselves, starting with the US. The share of dollars in FX reserves fell 3.5ppt during Trump’s administration, according to IMF COFER data, even as the currency appreciated (Chart 1). Adjusting for FX and bond price moves, the drop was even larger (Chart 2). The Trump effect was even larger than the freezing of Russian FX reserves after the outbreak of the Russia-Ukraine war.
Moreover, academic studies find other countries have indirectly paid for US military protection. One way was to hold more dollars than would economically make sense. It is estimated allies boost their share of dollars up to 30ppt. Trump has made clear military support now must be explicitly paid for, or other countries must increase their defense spending. Countries now have another incentive to shed their dollars.
With Trump back in office and ready to fight the rest of the world, 2025 could be a moment of reckoning for the dollar as the reserve currency. To start with, it could fall below 50% of FX reserves, but could it fall to 45% or even 40%?
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)