US dollar dominance faces fresh questions, but no credible challenger is in sight

Questions about the future of the US dollar have resurfaced as geopolitics intensify and concerns grow around the independence of America’s central bank – but the greenback remains firmly entrenched at the centre of the global financial system with no realistic alternative emerging in the near term, according to CommBank Senior Economist and Currency Strategist, Kristina Clifton. 

The US dollar has been the world’s primary reserve currency for around 80 years, but concerns about its long-term role have intensified in recent years. 

Speaking on the latest episode of the CommBank View: Economics and Markets podcast, Clifton says a key driver has been growing unease about the independence of the US Federal Reserve, particularly amid sustained public pressure from President Donald Trump for lower interest rates. 

“If markets become worried that monetary policy is being influenced by political priorities rather than inflation control, that can undermine confidence in US dollar assets,” she said. 

Geopolitics has also played a role. The freezing of Russian reserve assets following the war in Ukraine has prompted some countries to reconsider how concentrated their reserves are in US dollars and euros, accelerating moves – at the margin – towards diversification, as some countries seek to reduce exposure to the risk of sanctions or asset freezes. 

Gold, yuan and diversification – small shifts, not seismic change 

Some emerging market central banks, including China and Russia, have responded by increasing their holdings of gold and marginally reducing purchases of US dollar assets, though these shifts remain modest in the context of global reserve allocations. 

China has also sought to increase the use of its own currency in trade settlement and commodity transactions, encouraging counterparties to accept payments in renminbi. 

But Clifton cautions these developments should be kept in perspective. 

“While the use of the Chinese renminbi in trade and commodity markets is rising, it still represents a very small share of global transactions,” she said. 

China’s currency is often cited as a potential challenger to the US dollar, reflecting the scale of the Chinese economy and its growing geopolitical influence. 

However, Clifton says structural barriers remain significant, meaning the yuan is not yet a viable contender for global reserve currency status. 

“These include capital controls, a managed exchange rate and limits on investors’ ability to freely move funds in and out of China,” she said. 

China’s economic model also poses challenges. As a major exporter running persistent trade surpluses, it is less suited to issuing the large volume of safe, liquid assets the global financial system needs from a dominant reserve currency issuer. 

While usage is growing, the renminbi remains far from challenging the US dollar’s global role. 

What about the euro? 

The euro is another frequently touted alternative, benefiting from strong institutions and a freely floating currency. 

But Clifton notes Europe currently lacks a sufficiently large pool of highly rated, unified government debt. 

“Only a small share of global AA-rated government bonds are issued in Europe, compared with the majority being issued by the US,” she said. 

“The absence of a full fiscal union also limits the euro’s ability to take on a significantly larger global role,” making it unlikely to rival the US dollar at scale. 

Safe haven status remains – with some caveats 

Recent geopolitical tensions, including conflict in the Middle East, have again highlighted the US dollar’s traditional role as a safe haven. 

While the currency has behaved broadly as expected, rising during periods of global uncertainty, Clifton says that response has been somewhat weaker than in past crises, suggesting a modest erosion in its safe-haven strength. 

“Policy uncertainty and aggressive trade actions in recent years appear to have temporarily reduced the strength of the US dollar’s safe-haven response,” she said. 

Other currencies such as the euro, Japanese yen and Swiss franc have stepped up marginally as alternative safe havens, though none have displaced the US dollar’s central role. 

Bottom line

Despite growing debate around de-dollarisation, global demand for US assets remains strong, with continued foreign investment flows and deep capital markets reinforcing the dollar’s position.

Recent data also shows ongoing foreign purchases of US Treasuries, underscoring continued confidence in US dollar assets.

"The narrative around de-dollarisation tends to resurface during times of uncertainty,” Ms Clifton said. “But at present, we’re not seeing anything close to a collapse in demand for US dollar assets,” highlighting the gap between de-dollarisation rhetoric and real-world market behaviour. 

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