Why the end of the US dollar’s reign is just a mirage

Beneath the surface of international trade and capital markets there is a more nuanced, but no less important, shift underway. The greenback is not being replaced, but US dollar-denominated assets are gradually losing their unrivalled gravitational pull on global portfolios.

The American currency’s reserve status will be increasingly shared with other countries over many years which has been in-train for over a decade.

As economist Stephen Miran noted recently, global trade is still overwhelmingly cleared in US dollars. Even China’s efforts to invoice trade in renminbi has barely shifted the needle. SWIFT data shows that the US dollar still intermediates roughly 49 per cent of global transactions, eclipsing the euro, pound, yen and yuan combined.

The infrastructure underpinning cross-border finance from payments to syndicated lending remains US dollar-centric.

Yet focusing solely on trade flows risks missing the more profound transformation in global capital allocation.

Foreign official holdings of US Treasuries, for example, as a percentage of GDP, have been in steady decline since 2015.

Sovereign funds, pensions, and private investors are quietly diversifying – not abandoning – the dollar and are recalibrating the mix of dollar-denominated risk they are willing to underwrite.

The reasons are structural, not sentimental. Unorthodox monetary policy has exposed vulnerabilities in US dollar funding markets.

Recent shifts in capital markets have played a part. The extraordinary outperformance of US equities over the last decade has set a daunting benchmark unlikely to be repeated in an environment of higher real interest rates and global industrial realignment. When valuations peaked and markets looked elsewhere, pressure was put on US dollar valuations.

Geopolitics has also given many decision makers pause for concern. The sanctions on Russian central bank reserves of US Treasuries accelerated the search for alternative reserve currencies. The sanctions got many central banks to acutely question their holdings of US Treasuries. Russia was forced into a credit event by losing access to its reserves and lost repayment capacity as a result.

Investor steps to preserve and grow capital

Investors find themselves navigating a subtle but meaningful pivot: the US dollar remains king, but the court is no longer as unified or deferential as before.

But for investors seeking to preserve and grow capital, there are a number of implications.

First, portfolio construction must reflect a world of regional blocs, not a monolithic “global market”. Allocations to Asia (ex-China), India and select emerging market economies should rise that recognises the new centres of growth outside traditional Western corridors.

Emerging market bonds, for example, have become the developed markets bonds of the late 20th century, yet these are under owned by most investors.

After the Latin, Asia and Russian crises of the last century, many emerging markets undertook reforms. Exchange rates were floated, and, if inflationary, the central bank had to step in with high real rates. If that was recessionary, the recession was allowed.

Fiscal policy was austere, not stimulative. And insolvent financial and industrial institutions were allowed to fail which led to persistent external surpluses.

In contrast, the response of developed markets to crises over more than two decades has been the opposite. Policies were implemented, resulting in monetary policy enabling fiscal policy. Coordination was celebrated. Insolvent financial institutions were guaranteed and recessions were prevented at all costs.

Unorthodox policy can stabilise markets, but the moral hazard is it creates market distortions. The result? Deficits. US treasuries may no longer be as risk-free as they once were.

This leads to the second portfolio construction implication for asset owners – duration risk must be actively managed. The golden era of simply holding long-dated US Treasuries as a ballast against equity volatility may be behind us. Alternatives including infrastructure, real assets and short-duration private credit may offer better risk-adjusted returns in a world where inflation volatility is structurally higher.

Third, currency management deserves strategic elevation. Dynamic hedging strategies and the thoughtful inclusion of hard assets like gold as a reserve diversifier have become important tools in navigating a less predictable US dollar liquidity environment.

Finally, investors must be ever more diligent and agile. This is not a time to abandon US dollar assets, but rather to adjust conviction and time horizons in a world where the cost of US dollar funding and the behaviour of US policymakers may be less benign and more unpredictable.

The greenback remains the world’s reserve currency. But the old model, where global capital concentrated into US assets without hesitation, is being gradually dismantled. This has been a process decades in the making.

Investors who cling to the past risk underperformance. Those who adapt to this new, more fragmented global reality, allocating with greater nuance across geographies, asset classes and currencies will be better positioned to grow capital over the next cycle.

The greenback’s dominance isn’t ending. The world around it has changed. As leading thinker Peter Drucker said: “The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday’s logic.”

This article was originally published in The Australian Financial Review on 2 June 2025.