The US dollar remains the anchor of the global financial system – accounting for 57 per cent of global foreign exchange reserves, dominating global trade invoicing and serving as the primary safe haven in times of crisis.
But its status as the world’s default currency is no longer absolute. The foundations of that position are being slowly eroded by geopolitical realignment, shifting trade dynamics and the rise of alternative financial infrastructure. This is not the end of an era – but it may be the beginning of a long fade.
For investors both globally and locally, the implications are significant. A weakening dollar does not spell crisis, but it does demand a plan.
Exceptional performance
Since the end of the Second World War, the US has enjoyed a powerful combination of economic scale, capital market depth and institutional trust. These forces elevated the dollar to global reserve currency status under the Bretton Woods system – a position it has retained even after the collapse of the gold standard in the 1970s.
That dominance supported a virtuous cycle: lower borrowing costs, stronger investment and consistent capital inflows. Over the past 15 years, this has propelled the US to the centre of global asset allocation. America’s innovation-led growth, particularly in technology, drove US equities – led by the Magnificent Seven – to dominate global indices, briefly exceeding 70 per cent of the MSCI World Index in 2024. For unhedged Australian portfolios, this delivered a double kicker: booming US assets and a firm US dollar.
But this exceptional performance is facing structural headwinds. A more fragmented and contested global order is emerging – and with it, the dollar’s supremacy is increasingly being called into question.
US exceptionalism is under threat, and with it the dollar
Many of the economic dynamics that favoured the US in the post-war era are undergoing structural shifts, driven by three main factors.
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First, the US has overplayed its reserve currency status as a tool of geopolitical influence. Its expansive use of financial sanctions – notably against Iran and Russia – has prompted some countries to reduce reliance on US-controlled systems. This has accelerated the development of parallel financial infrastructure, such as Russia’s SPFS, China’s CIPS and BRICS Pay. These alternatives are enabling cross-border payments that bypass the dollar entirely.
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Second, central banks are diversifying away from the dollar. While still dominant, the greenback’s share of global reserves has declined meaningfully over the past two decades. Recent years have seen record gold purchases by central banks, a shift partly driven by geopolitical concerns and a desire for more tangible assets.
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Third, evolving trade patterns are undermining the incentive for dollar accumulation. The US’ new “reciprocal” tariff regime, designed to reduce trade imbalances, may diminish the need for emerging markets to hold large FX reserves. As more economies move away from pegged currencies or managed exchange rates, their demand for dollar assets could wane.
Taken together, these forces suggest a slow erosion – not an abrupt collapse – of dollar dominance. The future is likely to be more fragmented, regionally aligned and digitally integrated.
What does a post-dollar world look like?
Although alternatives are slowly becoming more viable, there is no ready-made successor to the US dollar. The euro offers depth and stability but suffers from political fragmentation, while the yuan has made important strides in cross-border use but remains constrained by capital controls. And while digital currencies are gaining traction, most still rely on US backing or remain too volatile for widespread adoption.
Instead, what we’re likely to see is a multipolar currency landscape: a system where multiple currencies – and potentially digital alternatives – coexist, compete and dominate within their regions. The dollar will likely retain its lead in the Americas, the euro in Europe and the yuan may play a greater role in Asia. In this more fragmented world, no single currency enjoys unchallenged dominance.
The best choice … for now
For Australian investors, the key question is not whether the dollar will disappear – it won’t – but how to manage risk in a world where its tailwinds are no longer guaranteed. There are a few main ways in which investors can act today:
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Revisit currency hedging strategies: Many portfolios have passively benefited from dollar strength over the past decade, but the next phase may involve more volatility and downside risk. Hedging strategies – ranging from passive overlays to dynamic, risk-managed approaches – can help protect capital and provide new sources of return.
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Watch the Fed: We expect the US central bank, constrained by tariff-induced inflation and rising fiscal imbalances, to begin cutting rates in late 2025. If that marks the beginning of a more sustained easing cycle, it could accelerate the dollar’s downward drift and confirm the end of the bull run that began in the early 2010s.
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Diversify beyond the US: If the dollar and US mega caps underperform, investors with global exposure skewed heavily to the US could find themselves overexposed to a regime shift. A tilt towards regions and sectors less correlated with the US cycle may help cushion portfolios and capture new sources of growth.
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Consider gold as a liquidity sleeve: With central banks validating its role as a non-aligned reserve asset, a modest allocation to gold can help diversify currency risk without adding unnecessary complexity.
The long fade
The dollar remains the strongest candidate for global reserve currency – but its lead is no longer unchallenged, as the forces driving global capital are shifting. Rather than a sudden dethroning, the dollar’s future may be shaped by a slow rebalancing towards a more multipolar, strategic reserve framework.
In a fragmenting world, the greenback may still be king – but its court is getting crowded. Investors would be wise to start preparing now.
Matt Badowski, co-head of quantitative portfolio management, currency solutions, Insight Investment
