Still King Dollar? Dr. Jarmo Kotilaine is a seasoned development economist with 30 years’ experience across academia, consultancy, banking and government. The global debate about the dethroning of the dollar has resumed. The reasons are not new, as several factors converge to again threaten the credibility of the US currency. Above all, concern is mounting about fiscal sustainability as the US joins a growing number of countries with a triple-digit debt-to-GDP ratio. In a sign of investor unease, the yield on the 10-year Treasury recently topped five percent for the first time since 2007. The Congressional Budget Office now projects a continued rise in national debt to roughly 120 percent of GDP by 2036. In parallel, global economic fragmentation, amplified by war and sanctions, is pushing more countries away from the dollar’s orbit. Finally, the rise of China as an alternative superpower is part of a broader story of a group, however heterogeneous, of emerging markets seeking alternatives to the US-dominated global financial order. How real is the threat to the dollar? While the US dollar’s share of global central bank reserves far eclipses all other currencies, it has been very gradually, but consistently, eroding for years. Having made up 71 percent of the total in 2000, it currently stands at 57 percent. Nonetheless, nearly 90 percent of global foreign exchange transactions are in dollars. There have been various pretenders to the throne over the years. The emergence of the euro as a freely traded currency for a large economic bloc of countries seemed to offer the most credible alternative. But Europe’s divisions, mounting fiscal and demographic challenges and mediocre growth performance have taken the shine off the single currency. Other traditional reserve currencies, such as the Japanese yen and Britain’s pound sterling, have similarly lost ground. While the Australian dollar, the Canadian dollar and the Swiss franc have made some gains, they are issued by far smaller economies and backed by relatively shallow financial markets. The Challengers Similarly, China’s seemingly relentless rise and pivotal role in global commerce was expected to favour the renminbi. Beijing has indeed actively sought to foster the globalisation of its currency, albeit primarily within bilateral trading relationships. While China’s geoeconomic status is rising, the country is also weighed down by extreme demographic and structural economic challenges, in some ways more daunting than those seen in Europe. But most fundamentally, while China’s economic weight has increased, its financial markets lag far behind their Western counterparts. The renminbi is not a freely convertible currency and the scale of internationally traded Chinese financial securities is still relatively limited. Other potential challengers to the dollar have been seen in gold and, more recently, the expanding range of crypto-assets, such as Bitcoin. Amid mounting global uncertainty, many central banks have indeed been systematically building up their gold reserves, but the use of gold in trade and finance is marginal. The last formal linkage between gold and the global currency system was severed by President Nixon in 1971. The challenges facing crypto-assets are little different, in some cases further amplified by their limited track record or lack of a direct link to real assets. While stablecoins in particular have gained traction, many are in fact linked to the dollar. As much as the apparent case for the dollar’s dethronement is not new, neither are the various counterarguments. While various pronouncements by the Trump administration against the backdrop of a turbulent year were seen by many to herald a dollar decline, the Federal Reserve’s dollar index has held broadly steady, while currency volatility has in fact diminished. A Changing Reserve System No less importantly, there are growing indications that the debate about dominant reserve currencies is becoming outdated. Historically speaking, the pattern of large US dollar reserve balances is a relatively recent phenomenon, something that largely emerged since the turn of the millennium. In part, this pattern was a response to the emerging market financial crises of the late 1990s. For surplus exporters, US dollar buffers effectively became an insurance policy against similar disruptions. Most importantly, China, by pegging the renminbi, accumulated large official reserves. High oil prices allowed oil exporters to do the same, much as they had in the 1970s. In parallel, the US was able to sustain substantial current account and fiscal deficits funded by foreign sovereign investors in its Treasury market. Now, however, the accumulation of new reserves appears to have plateaued. The American twin deficits are increasingly funded by private foreign investors acquiring US assets. While there have been growing signs of a weakening foreign appetite for US sovereign debt, the broader popularity of US assets has dramatically increased. bahrainthismonth.com | OCTOBER 2026 OPINION 72
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