For decades, debates about the future of dollar dominance have focused on outside challengers: the euro, the Chinese renminbi and, more recently, cryptocurrencies. Barry Eichengreen, one of the world’s leading monetary historians, believes those debates are looking in the wrong direction. In his view, the gravest threat to the greenback’s global role comes not from abroad but from the United States itself, and specifically from its politics rather than its economy.
Eichengreen, a professor of economics and political science at the University of California, Berkeley, set out his argument in an interview with World Finance tied to his book Money Beyond Borders: Global Currencies from Croesus to Crypto. The book traces how international currencies have risen and fallen from ancient Greece through medieval Florence, Amsterdam and Britain, and applies those lessons to the present.
The Political Foundations of Dollar Dominance
A global currency, Eichengreen argues, rests on political preconditions as much as economic size. Investors and central banks hold dollars because they trust the rule of law, the separation of powers, effective control of corruption and an independent Federal Reserve. They also weigh whether the United States is a reliable ally and partner. Erode those foundations and the appeal of dollar assets weakens, regardless of how large or dynamic the US economy remains.
He singles out the Fed’s dollar swap lines as a critical but underappreciated pillar of the system. These arrangements allow foreign central banks to obtain dollars and lend them on to their own banks during periods of stress, effectively making the Fed the world’s lender of last resort. Eichengreen worries that a more nationalistic approach could change that. He points to Stephen Miran, a temporary appointee to the Fed’s board, who has reportedly questioned the Fed providing this support to other countries without compensation, and to Kevin Warsh’s desire to shrink the Fed’s balance sheet. A smaller, more domestically focused Fed, he suggests, may be less willing to supply global liquidity.
Nixon, Trump and the Weak-Dollar Temptation
Eichengreen sees clear parallels between the Nixon era and the current administration. In August 1971, Richard Nixon imposed a 10 percent import surcharge as part of a strategy to push the dollar lower without other countries responding with devaluations of their own. Today, tariffs are again being used as leverage to pressure trading partners, and talk of a so-called Mar-a-Lago Accord has echoed those earlier efforts to engineer a weaker currency.
His verdict is that neither approach works as intended. The exchange rate, he argues, is a minor factor in US competitiveness compared with productivity growth, workforce skills, entrepreneurship, capital investment and an efficient tax system. Trying to fix structural issues through the currency misses the deeper drivers of economic performance.
The comparison carries an extra warning. The Nixon shock of 1971 also ended the dollar’s convertibility into gold and brought down the Bretton Woods system of fixed exchange rates. The dollar nonetheless kept its central role, largely because no credible alternative existed and US institutions remained trusted. Eichengreen’s concern is that today the institutional side of that equation, rather than the absence of rivals, is what is being tested.
Exorbitant Privilege or Heavy Burden?
Some figures around the Trump administration argue that the dollar’s reserve role is a burden, keeping the currency overvalued and hurting American manufacturers. Eichengreen acknowledges that earlier dominant currency issuers, including Florence in the fifteenth century, Amsterdam in the eighteenth and Britain in the late nineteenth and early twentieth centuries, did face overvaluation and competitiveness pressures.
On balance, however, he sides with the mainstream view of an exorbitant privilege. American firms can conduct cross-border business in their own currency, strong demand lowers the cost of financing Treasury debt, capital tends to flow into the US during global turmoil rather than out, and dollar dominance gives Washington unmatched power to impose financial sanctions.
Why the Euro and Renminbi Still Lag
If the dollar is vulnerable, the obvious question is what might replace it. Eichengreen says the euro has made no progress against the dollar as a global currency since 2001. He identifies three missing ingredients: a genuine capital markets union, which faces resistance from national interests; a deep pool of safe assets, given that only three euro-area governments carry top ratings from all agencies, with roughly €3trn of securities between them against an estimated $30trn to $40trn of US Treasuries; and a common defence and security policy. He quips that having 13 EU countries building 13 different tanks hardly signals military integration.
China, meanwhile, is following the playbook the Fed adopted after 1914, promoting its currency first for trade and then for finance. Its cross-border interbank payment system has close to 200 direct and around 1,600 indirect participants, the multi-central-bank mBridge platform is advancing, and the People’s Bank of China has signed more swap agreements than either the Fed or the ECB. Yet the gap remains vast: the dollar accounts for nearly 60 percent of global foreign exchange reserves, compared with about 2 percent for the renminbi, and growth in renminbi cross-border use is slowing. Without checks and balances, rule of law and an independent central bank, Eichengreen doubts China can close that gap in his lifetime.
Stablecoins and the Future of Digital Money
On digital currencies, Eichengreen separates the technology from the money that runs on it. He believes blockchain-based rails are here to stay for cross-border payments, but the question is which units will dominate. Around 99 percent of stablecoins are pegged to the dollar, which might seem to reinforce American power. He nonetheless thinks the US is betting on the wrong horse. While the ECB and PBoC are backing tokenised deposits and central bank digital currencies, Congress has barred the Fed from issuing a CBDC. Private stablecoins, he argues, raise doubts about stability and interoperability, whereas tokenised bank deposits build on an already regulated system.
Conclusion
Eichengreen does not predict the dollar’s sudden collapse. Instead, he warns that a world without clear dollar dominance would be more fragmented, divided into dollar, euro and renminbi spheres. The priority, he argues, should be ensuring those blocs overlap and keep trading with one another, because a complete split would recall the damaging lessons of the 1930s. For investors and policymakers, his message is clear: the greenback’s future will be decided less in Beijing or Brussels than in Washington.
