Enduring Preeminence

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Bibliographic details

• Authors: Eswar Prasad
• Published: June 2, 2022

Summary judgment

• The US dollar is likely to remain the dominant reserve currency and supplier of “safe assets” for the foreseeable future, even as its role as an intermediating payment currency could erode.
• New economic, geopolitical, and technological forces are creating pressures that could alter aspects of the international monetary system, but these forces are unlikely to “knock the US dollar off its pedestal.”

Current dominance of the dollar

• Nearly 60 percent of the world’s central banks' foreign exchange reserves are invested in dollar-denominated assets.
• Almost all commodity contracts, including those for oil, are priced and settled in dollars.
• The dollar denominates and settles a majority of international financial transactions, giving the United States considerable influence via the US banking system and sanctions capacity.

Structural shifts and their implications

• Raw US economic dominance: the US economy now accounts for about 25 percent of global GDP (at market exchange rates), down from 30 percent in 2000.
• Shifts in global economic power toward emerging market economies, led by China, have been underway for more than two decades.
• Digital currencies and payments technologies:
  • New technologies enable cheaper and practically instantaneous payment and settlement of cross-border transactions, reducing frictions in international trade and remittances.
  • Central bank collaborations (example: China, Hong Kong SAR, Thailand, and the United Arab Emirates) are developing interoperable payment solutions for cross-border transactions.
  • Reduced settlement delays lower exchange rate hedging needs for exporters and importers, and lower remittance fees for migrants.
• Foreign exchange market changes:
  • Direct transactions between emerging market currency pairs (example: renminbi to rupee) are becoming cheaper, reducing reliance on “vehicle currencies” such as the dollar.
  • Declining intermediating role of the dollar in payments could reduce its role in denomination of various transactions (example: oil pricing) where alternative currencies are used.

The renminbi and digital currencies

• Measures of renminbi international use:
  • About 3 percent of international payment transactions use the renminbi.
  • About 3 percent of global foreign exchange reserves are held in renminbi.
• Drivers and limits to renminbi internationalization:
  • Progress: removal of some cross-border capital flow restrictions, more market-determined exchange rates, broader foreign investor access to Chinese bond markets.
  • Constraints: absence of institutional changes needed to build foreign investor trust—specifically, China has not embraced an independent central bank or the rule of law to the degree typical of reserve currency economies.
  • A digital renminbi alone is unlikely to shift currency preeminence; China’s Cross-Border Interbank System (CIPS) and interoperability with other payment systems are more consequential for international payment use.
• Central bank digital currencies (CBDCs) and stablecoins could reshape currency convenience and accessibility, affecting smaller economies’ currency usage.

Effects on emerging market and developing economies

• Potential benefits:
  • Improved access to global capital markets for firms and households as payment frictions decline.
  • Easier international portfolio diversification and lower remittance costs.
• Potential risks:
  • Increased vulnerability to major central banks’ policy shifts and investor behavior.
  • Capital controls may become less effective; cryptocurrencies have already been channels for capital flight during currency collapses.
  • Greater capital flow and exchange rate volatility complicate domestic policy management and threaten economic and financial stability.
• Policy reaction:
  • Policymakers may expand foreign exchange reserves as buffers, but experience (Russia’s loss of access to much of its reserves due to sanctions) shows such buffers can be unavailable in crises.
  • Speculation about alternatives to advanced-economy government bonds (gold, cryptocurrencies, renminbi) faces practical limits:
  • Gold markets lack sufficient liquidity to be readily sellable in large quantities without price collapse.
  • Cryptocurrencies such as Bitcoin are highly unstable in value.
  • Renminbi is not fully convertible.

The “dollar trap” and safe assets

• Global exposure to US assets:
  • Foreign investors, including central banks, hold nearly $8 trillion in US government debt.
  • Overall US financial obligations to the rest of the world total $53 trillion.
  • US investors’ holdings of foreign assets total about $35 trillion and are denominated almost entirely in foreign currencies.
• Distributional effects of a dollar plunge:
  • A sharp fall in the dollar’s value would reduce the value of US dollar-denominated assets for foreign holders (for example, China’s holdings of US government bonds would be worth less in renminbi).
  • A dollar depreciation would create a windfall for the United States (reducing the real burden of its dollar liabilities) and impose large losses on creditor countries.
• Implication:
  • Even critics of the dollar may resist a sharp fall in its value, creating a “dollar trap” that sustains dollar dominance.
• Supply and demand for safe assets:
  • For the foreseeable future, demand for liquid, abundant “safe assets” backed by trusted financial systems is likely to remain strong.
  • The US dollar combines the world’s largest economy and financial system with a strong institutional framework, making the United States the dominant supplier of such assets.
  • Modest diversification trends have increased shares of Australian, Canadian, and New Zealand dollars in global reserves, but these and other leading reserve currencies (euro, pound sterling, yen) have only marginally dented the dollar’s share.

Impacts on small and less developed economies

• Threats:
  • National currencies lacking credibility or convenience could be displaced domestically by stablecoins or major-economy CBDCs.
  • Even volatile cryptocurrencies such as Bitcoin may be preferred to local currency during turmoil, facilitating capital flight.
• Likely outcome:
  • Economic turmoil is more likely to accelerate dollarization, particularly if digital versions of the dollar become widely available.
  • New technologies could lead to either increased currency competition or greater centralization with a few currencies accreting more power—many changes may reinforce the dollar’s dominance.

Overall conclusions and outlook

• The dollar’s role as the dominant reserve currency will likely persist, even if its use as a payment currency erodes (which itself is uncertain).
• A likelier prospect is a reshuffling of the relative importance of other currencies while the dollar retains primacy.
• New technologies and geopolitical developments might entrench the dollar rather than displace it.

Enduring Preeminence — Eswar S. Prasad, F&D Magazine, June 2022. Author affiliation: professor of economics at Cornell University, senior fellow at the Brookings Institution; author of The Future of Money; forthcoming The Doom Loop: Why the World Economic Order Is Spiraling into Disorder (published February 2026).

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