At the core of the international monetary system, there is a structural asymmetry between the privileged rich world and the poorer countries paying more on their debt
A few developed bond markets have the advantage of borrowing relatively cheaply, investing in more profitable assets and securing income inflows
Convertibility, with reliable transparency of capital financial flows, is the essence of this 'exorbitant privilege' benefiting the U.S. dollar but also the Yen, the euro, the British pound or the Swiss Franc
However, it is as reserve currency that Central Banks and financial institutions worldwide are committed to the U.S. dollar, and uniquely to the U.S. dollar
For these institutions, the American 'reserve currency' status compounds the guarantees of safety and liquidity of a convertible currency with military dominance and geopolitical superiority
Reflecting global reach, credibility of national governance and economic superiority, the status of the dollar was not summoned by diktat
The currency gained strength over decades as essential international bridge for trade and for finance, making globalization possible and fired up by its very success
This begs the question what the future holds when the factors which crowned the U.S. dollar look shaky and globalization is in retreat
What about global reach of an inward-looking nation, what about credible national governance of a heavily indebted country, what about an economic performance disputed by China ?
The dollar is indispensable and will remain so for as long as no currency offers a comparable full set of guarantees
However, I will argue that some currencies may compete with the dollar in some dimensions, say in international trade or by facilitating the diversification of Central Bank holdings
Slowly - and then quickly - the reign of the U.S. dollar will not appear so absolute
Fundamental change it is not, nor does it encourage tinkering with the international framework
To secure the American currency's 'privileged' standing in international financial flows, a network of firm monetary commitments and of informal understandings took hold
This trust could be defined as an array of factors
Trust - What is in a name?
In ancient times, seemingly eons ago, before 1971, foreign Central Banks depositing U.S. dollars in America could opt to exchange their holdings in physical gold, priced at 35$ an ounce
The decision by the Nixon administration to close the 'gold window' shifted the Bretton Woods system to floating currency rates, deprived of the gold anchor
Ultimately, jettisoning the pricing of the dollar in gold turned out to be symbolic, transformative but not revolutionary
Central Banks and financial institutions remained invested in dollar assets because there was no credible alternative
On geopolitical grounds, dollar preeminence is disputed today
Uncoupling from dollar-dependency gets promoted - and loosely implemented - by adversarial associations, such as the 'BRICs' teaming China and Russia with India (?) and Brazil...
The drop of the U.S. dollar share in worldwide Central Bank reserves, at 57% (IMF’s most recent COFER release, covering Q4 2025, of the dollar’s share of allocated reserves), would seem to support the argument
However, to state the obvious, it is the advent of the euro as credible alternative (20% of those reserves) which allowed diversification in reserve holdings
What is more, relevance of the dollar goes beyond official Central Banks reserves, seeking the security of a global power
State banks (global and regional entities, as in China), private banks, shadow banks, pension funds, private equity and trading houses are all holding on to precious dollars ...
Transparency, liquidity, military might and geopolitical alignment remain the key factors of the dollar's staying power but may be quite differently weighted in today's multilateral fragmented world
U.S. straight jackets of convertibility
America's military dominance, its powerful internal market and its geopolitical superiority, driving trades priced in U.S. dollars on global energy markets, became the true backers of foreign assets stored in dollars
This multifaceted insurance was the ultimate guarantee delivering safe access and liquidity of dollar holdings in U.S. debt obligations, to foreign investors
The burden of convertibility to qualify as 'reserve currency' storing excess dollars assets of foreign institutions (central banks, foreign banks and insurance companies) is light in the best of times
Successive American Administration understandably could downplay at their leisure the true cost of the dollar 'insurance' girding convertibility
In a troubled and competitive geopolitical world, however, those costs are coming down hard
- safe access to foreign dollar holdings is a cast-iron guarantee, violated by the Biden administration and the G7, freezing Russian assets following the invasion of Ukraine
- high quality governance, controlled by a strong judiciary, is the legal backing protecting foreign asset ownership, currently in the shadow of a dysfunctional U.S. political system
- liquidity of U.S. bond holdings, the preferred Central Bank allocation, is insured by its world-beating size, but giant budget deficits may unbalance the debt market with massive additional issues
In the larger scheme of the U.S. dollar's undisputed dominance in finance and in trade, and in projected military power, convertibility remains secure for now
Tiny cracks in the U.S. armor plating of convertibility do not signal large scale structural failure...yet
In the changing landscape of international trade powered by China's emergence, giving meaning and substance to regional blocks, and setting the stage for novel, digital, means of payment, now is not the time to weaken American guarantees ...
Solitude of the front runner
Alan Sillitoe’s classic short story (1959) - the Loneliness of the Long-Distance Runner - explores the elite sportsman's burden of racing out ahead, operating in a vacuum, without any support except his own stamina
The future challenges for the dollar are just as hard to divine, not just because the cost of insurance provided by the American currency is real - and rising in a multipolar world
Arguably, the most striking singularity of foreign assets in 'reserve' U.S. dollars resides in the many 'unknowns'
Unknown is the actual volume of dollars held in foreign accounts and unknown are the actual entities controlling those accounts
To turn a famous 1971 saying of former U.S. Secretary of Treasury John Connally, "The dollar is our currency, but it's your problem", on its head
With so many unknowns, it might be correct for a U.S. Secretary of Treasury to say today "The dollar is our currency and it now is our problem"
Reports on China' supposed dumping of U.S. Treasuries resurface with great periodicity
At the margins, this may, or may not, be true - but the point should be restated differently, if it matters at all
The U.S. Treasury and the Federal Reserve do not really know where foreign dollar holdings are held, how many and by whom
Stated differently, the American monetary authorities may believe in the U.S. dollar's destiny but do they really and fully have control ?
Unambiguously, the answer is 'no'
No one knows by how much the American authorities have lost control...and what is left of their sense of responsibility
Foreign ownership of U.S. Treasuries is reliably precise
Out of a total amount outstanding of $30.1 trillion, US Treasuries are, for $9.2 trillion, the premier assets owned foreign investors, both official and private, earning interest on these secure and liquid holdings
As of Dec. 2025, foreign ownership represents 31% of total Treasuries debt outstanding
As noted by Lance Roberts, the headline number ($9.2 trillion in December, further increased to $9.49 trillion by February '26) actually undercounts the reality. It excludes foreign holdings managed through U.S.-domiciled hedge funds and the Cayman Islands basis trade, which the Federal Reserve estimates pulls another $1.5 trillion of de facto foreign demand of U.S. dollars
For lack of a better angle for the 'unknown', I will approach the issue two-pronged in my follow-up reports - there are 'Eurodollars' and then there is 'China'
The issues are obviously unfathomably complex - a great reason for monetary authorities to stay mum
Eurodollars
What US Treasuries and extra-territorial dollar holdings have in common is sizable ownership by foreign entities
Foreign ownership of extra-territorial (non-US) dollar holdings should register at 100% except for the fact that the subsidiaries of US major banks are themselves very large players in this space
Carrying the confusing name of ‘euro-dollars’ because British banks initiated this dollar trade which has gone global since the 1960’s, holdings are not known with finality because there is no precise tracking of these deposits at foreign financial entities
By size, the euro-dollars are estimated at $13 trillion – twice as large as the uninsured domestic dollar and equivalent to total of all domestic dollar holdings – and for lack of a regulatory framework, may in fact run much higher
What more needs to be said ?
China U.S. dollar holdings
The 'dumping' of U.S. Treasuries is a gift that keeps on giving in some quarters, promising a severe reckoning for 'King Dollar'
There is (as so often) a figment of truth to the storyline
As shown by B. Setser of the Council on Foreign Relations, in discussing the discrepancy between formal reserves (and dollar share thereof) and foreign assets (held in dollars) in the sprawling Chinese financial establishment
"The big fall in the dollar share of China reserves (from 79% to 59%) occurred between 2005 and 2012 (though China only disclosed the 2015 number
During that period, China’s total reserves went from $800 to close to well over $3 trillion and its actual dollars continued to rise"
China has played a bit of a game. It reduced the dollar share of its formal reserves.
And unsurprisingly, China doesn’t disclose full data about the currency composition of the broader Chinese state (which tells a different story)
Mr. Setser focuses on the Chinese banks (on shore and off shore) international lending in U.S. dollars, a way for these institutions to contribute to the dollar's preeminence
Putting the pieces of the puzzle together,
- 55% of China’s $3.3 trillion in reserves is held in U.S. dollars, Treasuries and equity, for roughly $1.8 trillion
- State commercial banks have an estimated $1.1 trillion in dollar assets (as of Q1-2026)
- Policy banks have an estimated $1 trillion in claims on the world
- China Investment Corporation’s (CIC) private equity foreign assets of $450 billion are assumed to be in U.S. dollars
This is how off-balance sheet accounting makes $2.6 trillion disappear from official Chinese reserves but remain undisputedly Chinese dollar holdings
In summary
- Globalization has been the engine powering an 'indispensable' dollar - a bridge for trade and finance with the U.S. and between third countries
- Dollar dominance is real but fragile because the pillars of trust cannot be taken for granted
- American responsibility of the dollar's global status is less assured when the international framework is not supported (as it used to be)
The structural underpinnings of the U.S. dollar range from uncertain to unstable, not a good place to be in
- Americas' huge and growing public debt may destabilize the financial markets if (when ?) the bond holders revolt
- With market fragmentation, trade will concentrate around regional blocs, throwing global supply chains in reverse
- In crisis, shared interest and coordinated international response may not prevail ...
My follow-up reports will discuss
- China's Yuan 'international' strategy in "The Yuan also rises" (hat tip to Ernest Hemingway)
- America's international dollars - Eurodollars, stablecoins and dollar swaps