Bloomberg: The Era of Dollar dominance is coming to a close

The Global South is losing faith in the dollar. Why? The US slaps tariffs on friends and foes. The White House tries to bully its own central bank. Debt keeps rising. Sanctions turn the greenback into a weapon. Rising competition with China and broken security pacts with the Middle East fuel mistrust, Bloomberg stresses.

Beijing’s more flexible exchange rate slashes the need for hoarding dollars. Gulf rulers pour billions into megaprojects at home and take more risks with investments abroad—money they’re no longer parking in US Treasuries.

Of course, the dollar retains formidable strengths. The world’s biggest economy, deepest financial markets and strongest military are all powerful reasons for resilience. Investment pledges that President Donald Trump has extracted from major countries and corporations mean money flowing into the US.

On many measures, the dollar remains the world’s dominant currency. Yet one metric tells a different story. At the turn of the century, the dollar accounted for more than 70% of global FX reserves. Now, it’s less than 60%. If the euro area wasn’t so fragmented, and the Chinese financial system so closed, alternatives would be more attractive and the decline faster.

Why the Dollar’s Grip Is Slipping

In 2005 future Federal Reserve Chair Ben Bernanke offered an explanation for a conundrum: Why did long-term rates keep falling even as the Fed hiked? His “global savings glut” hypothesis argued that surplus nations such as China and Gulf oil exporters recycled vast earnings into American debt, boosting demand and making life cheaper for US borrowers.

Twenty years on, the dollar remains the world’s reserve currency, yet the dynamics are shifting. China’s reserves peaked at $4 trillion in 2014 but have since fallen to $3.3 trillion. The Gulf has accumulated almost $800 billion in trade surpluses since 2017, yet its reserves are flat.

The withdrawal from dollar assets is set to continue, driven by forces global and domestic. On the global side, the picture is clear:

• American assets no longer inspire the same confidence they once did. Government debt is high and rising. Washington slaps tariffs on allies and adversaries. Political brinkmanship leads to government shutdowns. The White House openly challenges its own central bank’s independence, raising fears of high inflation eroding the value of dollar holdings.
• The dollar was once a shield. Now it’s a sword. After Russia’s 2022 invasion of Ukraine, the US and allies froze $300 billion of Moscow’s assets. That step proved Washington is willing to use the currency for geopolitical leverage—a warning China and Gulf reserve holders can’t ignore.
• Chinese and American interests are drifting further apart, fueling Beijing’s fears about the safety of its Western investments. In the Middle East, Israel’s strikes on Qatar are the latest example of the fraying of the “energy for security” pact that tied Gulf states closely to the US for decades.

Easy Money From Abroad? No More

Looking ahead, the Gulf is unlikely to dump the dollar. The shift away from the greenback will remain gradual because of currency pegs and security ties. Trump’s willingness to punish even small signs of de-dollarization reinforces the constraint. Yet Washington can’t expect rising support either. Falling oil prices and the Gulf’s domestic priorities mean the declining focus on the dollar is set to continue.

China’s dollar holdings have only one way to go: down. The end of reserve accumulation and shrinking need for dollar-based trade invoicing and FX market intervention drive the divestment. The main brake? Finding markets liquid enough to absorb the sheer scale of its reserves. We explore two possibilities:

• A gradual decline in China’s dollar holdings, driven by the yuan’s rising trade role and China’s own economic mass—not geopolitics. Drawing on a model developed by International Monetary Fund economist Serkan Arslanalp and others, we find the dollar’s share of China’s reserves will fall from 58% today to 24% by 2050.
• Geopolitical tensions leading to rapid financial decoupling. A reference is Russia’s expedited effort to cut its ties to the US currency. From the end of 2016 to the end of 2021, the share of dollars in Russia’s reserves plunged to 11% from 40%. Should China follow a similar path, its holdings of dollar assets would fall to almost zero in a short period of time.

The era of easy foreign savings flowing into dollar assets, suppressing US borrowing costs and giving Washington a powerful sanctions lever, is moving slowly to a close. That points to higher rates ahead, making the US debt burden heavier, its investments at home more expensive and its policy choices abroad more restricted.

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