Each time the de-dollarisation debate resurfaces, it is framed as evidence that the US dollar’s dominance is nearing its end but Franklin Templeton believes a replacement to the greenback doesn’t yet exist.
Chief investment officer Sonal Desai observed that the US dollar’s “obituary” has been written many times and with increasing frequency over the past year.
Her comments come amid a recent Deutsche Bank (DB) Research Institute report arguing that Middle East tensions represent a “perfect storm for the petrodollar.”
The widely cited “petrodollar thesis” argues that US dollar dominance is underpinned by global oil trade being priced in dollars, a system formalised in a 1974 US–Saudi arrangement that linked dollar invoicing of oil to American security guarantees. Because oil sits at the centre of global industrial activity, this arrangement is said to have driven sustained demand for dollars well beyond energy markets.
“The DB report argues that this arrangement is now fraying: 85 per cent of Middle Eastern crude oil goes to Asia rather than the United States; Saudi Arabia is localizing defense under Vision 2030; Iran’s oil exports are increasingly priced in renminbi through agreements with China; and with the war in Iran, the United States has actually brought turmoil to the Middle East, undermining regional security,” Desai said.
The implication is that oil trade will increasingly be priced in currencies beyond the US dollar, gradually reducing its central role in global energy markets and, over time, contributing to a potential erosion of dollar dominance.
But Desai argues this interpretation is incomplete.
“This view is remarkably simplistic, in my view. In fact, it gets the causation partly backwards. Oil is not priced in US dollars simply because the United States has long acted as the world’s policeman.
“Oil exporters have a strong self-interest in getting paid in USD, because of what dollars represent: access to the deepest, most liquid capital markets in the world, backed by an institutional and legal framework that protects property rights and enforces contracts, supported by a strong, dynamic, and innovative economy.”
She says three pillars underpin dollar dominance: the scale and dynamism of the US economy, institutional credibility, and unmatched financial market depth.
According to Desai, no credible alternative to the greenback currently exists.
“The euro area cannot issue a unified safe asset at sufficient scale. The renminbi operates behind capital controls and lacks convertibility. Digital currencies – whether central bank digital currencies or private stablecoins – settle transactions but do not provide the store of value function that reserve currency status requires.”
She adds that a basket of currencies does not constitute a reserve currency and most stablecoins are also denominated in US dollar.
“The US dollar’s real competition, in my mind, is not yet on the horizon. Not because alternatives are inconceivable in principle, but because building the institutional infrastructure required – deep markets,rule of law, full convertibility, a track record of macro stability – takes decades, not years.”
The US dollar recently fell to a four-year low against a basket of currencies, driven by inflation concerns, Federal Reserve policy shifts and trade uncertainty.
“Some commentators have pointed to this as evidence of structural decline. I see it differently,” Desai said.
“In broad, real, trade-weighted terms, the dollar remains well above its troughs of the mid-1990s and the late 2000s – levels at which no serious analyst argued dollar primacy was ending. Some dollar softness is perfectly consistent with global reserve currency status. Unlike the renminbi, the dollar is a freely floating currency. It floats. Up and down.”
She argues the US fiscal position is the key long-term risk.
“Federal debt held by the public is projected by the Congressional Budget Office to exceed 110 per cent of GDP by 2032, with no credible consolidation plan currently on the legislative table. Sustained deficits at this scale risk, over time, undermining the very institutional credibility that makes dollar assets attractive.
However – and this is crucial however – virtually every major competitor faces the same problem. The euro area’s debt-to-GDP ratios are elevated; Japan’s are higher still; and China’s total debt load, including local government financing vehicles, is hardly reassuring.”
Despite these risks, Desai remains broadly constructive on the dollar’s outlook and believes, while some erosion of dominance is possible, it is unlikely to be displaced.
“The dollar faces headwinds, and we are currently in a highly volatile environment. Investors would be wise to stay nimble about currency exposure at the margin – the dollar’s real effective exchange rate remains to be determined by shifting growth differentials and fiscal paths. But the US dollar also enjoys a resilient set of tailwinds, with no credible competitors currently on the horizon.
“But replacement appears unrealistic. I see no basis for positioning as though reserve currency displacement is imminent. The dollar’s dominance, for now, remains unchallenged.”
Meanwhile, the Australian dollar is forecast to trade in a range of around 0.69 to 0.75 US cents in 2026, supported by stronger commodity prices, US dollar weakness and relatively tight monetary policy from the RBA.
The currency rose 2.5 per cent last week following strong labour market data but opened lower on 20 April after reports that the Strait of Hormuz had been closed again.
“AUD extended its gains last week, rising 2.5 per cent through the week against the US dollar, with the AUD/NZD cross climbed to 1.219. The local currency was heavily supported by robust labour force data, with AUD rising 0.9 per cent following the release. AUD did retrace later in the week following reports that a final peace deal between the US and Iran could take six months,” said Ebury economist Anthony Malouf.
“However, the Aussie found renewed strength on Friday evening as the Strait of Hormuz was reopened.
However, this was short-lived, as Iran announced over the weekend that the Strait had been closed again, due to the ongoing US blockade. The Aussie opened lower [on 20 April] off the back of this news.
The key focus this week will be on the imminent expiration of the US-Iran ceasefire agreement.
“While an extension of the ceasefire is likely already priced in, a more definitive resolution would provide a larger boost for the currency. Nevertheless, the Aussie continues to remain highly sensitive to breaking geopolitical headlines.”
