The Dollar's Many Lives
What the de-dollarization debate gets wrong — and what it gets right
Barely a week passes without a new headline about de-dollarization. A BRICS summit communiqué. A bilateral trade deal settled in yuan. A central bank quietly adding gold to its reserves. A Gulf state accepting non-dollar payments for oil. The list goes on.
But almost all the commentary misses the same thing. It treats the dollar as one object that either holds or breaks, when the dollar is in fact two very different things — with different sources of power, different costs, and very different prospects.
To see why that distinction matters, it helps to start not with currencies, but with the engine that produced dollar dominance in the first place.
The Flywheel
Ray Dalio spent years studying the rise and fall of empires — the Dutch, the British, the American — and identified a flywheel that runs through all of them. Military strength protects trade routes. Control of trade routes makes a nation’s currency the one everyone else wants to use. Reserve currency status gives that nation the privilege of borrowing cheaply from the rest of the world. Cheap borrowing funds the military. The loop closes.
Dalio also maps how the loop breaks. As the dominant power borrows more, it grows complacent. Debt rises. The cost of maintaining military protection of trade routes becomes a net drain rather than an investment. Foreign creditors begin to question the currency. Reserve status erodes. The military weakens. The empire declines.
The US sits at a particular point in that cycle. Its interest payments on government debt now exceed its defense spending — a pattern both Dalio and Niall Ferguson have argued historically coincides with hegemonic decline. The dollar has already lost around 8% of its value in the first semester of 2025, the largest half-year decline since 1973. Markets reacted to the “Liberation Day” tariff announcements of April 2025 with an unusual pattern: investors did not flee to dollar assets as they would in a normal risk-off episode. They hedged their dollar exposure instead.
None of this means the dollar is collapsing – at least, not today. But economists Hélène Rey and Ludovic Subran, writing for France’s Conseil d’analyse économique in March 2026, identify the current moment as a “Kindleberger gap”: a period in which the dominant power is no longer fully able — or no longer fully willing — to provide the global public goods that underpin monetary leadership. Open trade, safe reserve assets, external security, lender-of-last-resort functions: these are the foundations on which reserve currencies have historically rested, and they require a hegemon prepared to bear the cost of supplying them. That willingness is now openly in question.
The flywheel is still turning. The question is which parts of it are under strain — and to answer that, the distinction the de-dollarization debate keeps failing to make must be made clearly.
Two Roles, One Currency
The dollar performs two distinct functions in the global economy.
The first is the reserve currency role: the dollar as a store of value, accumulated in central bank vaults, the denomination of choice for sovereign wealth funds and international investors seeking safety. Today the dollar accounts for approximately 58% of global foreign exchange reserves, far ahead of the euro at around 20% and the renminbi at less than 2%.
The second is the trade currency role: the dollar as the medium of exchange for global commerce, used to price commodities, settle contracts, and clear cross-border payments. Approximately 60% of global trade is invoiced in dollars — dramatically out of proportion with America’s 14% share of world trade. More importantly, virtually every dollar-denominated transaction anywhere in the world, between any two parties, in any country, clears through the US financial system.
The two roles reinforce each other through a simple mechanism. If you sell commodities in dollars, you accumulate dollar surpluses. You then need somewhere safe to park them — and US Treasuries are the obvious answer. If you expect to buy oil or manufactures priced in dollars, you hold dollar reserves as a buffer against the day you need them. Trade currency status thus generates reserve currency demand almost automatically. And reserve currency demand, in turn, deepens the dollar’s dominance of trade: the more widely dollars are held, the more natural it is to invoice in them. This self-reinforcing loop is the core of the flywheel — and it is why the two roles, though distinct, have historically moved together.
Even if they’re related, the two roles are not the same, and the power they confer is different in character. Reserve currency status is about what countries hold. Trade currency status is about what every transaction passes through — and who controls the gate.
That gate is also the source of something often underappreciated: America’s sanctions power is not a foreign policy tool bolted onto the dollar system. It is intrinsic to the architecture of dollar clearing. To be excluded from dollar settlement is to be excluded from the global economy. Iran cannot sell oil internationally through normal channels. Russia’s largest banks cannot access global capital markets. Venezuela cannot conduct ordinary international commerce. These are not merely financial inconveniences. They are existential pressures, applied through a payments infrastructure that most of its users never think about.
Understanding how the US came to hold both roles, and which is now under threat, is essential to understanding what comes next.
How The Flywheel Was Built
Dollar dominance was constructed, layer by layer, across three decades of deliberate architecture — and the two roles were accumulated separately.
The reserve currency foundation was laid at Bretton Woods in 1944. With Europe devastated and the US holding the majority of the world’s gold reserves, forty-four nations agreed to anchor the global monetary system to the dollar, pegged to gold at $35 per ounce. But the system carried a structural flaw from the outset — what economist Robert Triffin identified in 1960. To supply the world with the dollar liquidity it needed to grow, the US had to run persistent balance of payments deficits. Those deficits gradually undermined confidence in the gold peg.
It was within this Bretton Woods system — and partly because of its constraints — that the eurodollar market took root. US capital controls and domestic interest rate ceilings pushed dollar-denominated business offshore, primarily to London, from the late 1950s onward. The result was a growing pool of dollars circulating entirely outside the US banking system, beyond the reach of American regulation. With the growth of eurodollars, the dollar was becoming stateless: a global currency that happened to be issued by one nation. Crucially, this offshore ecosystem flourished precisely when America’s capital account was not open — a reminder that dollar internationalization and financial liberalization are not the same thing, and did not arrive together.
In August 1971, facing a run on US gold reserves, President Nixon closed the gold window. The dollar became a pure fiat currency, backed by institutional trust rather than metal — and America’s capital account began its long opening. The eurodollar market, which had grown up in the constraints of the old system, now expanded further still as those constraints fell away.
What followed secured the trade currency role: the petrodollar deal. In 1974, the Nixon administration struck an agreement with Saudi Arabia. In exchange for American military protection, Saudi Arabia would price its oil exports in dollars and recycle surplus revenues into US Treasury bonds. The other OPEC nations followed. Because the world needed oil, it needed dollars to buy oil. The self-reinforcing loop described above — trade generating reserve demand, reserve demand reinforcing trade — now had an energy engine driving it. Every barrel of oil traded anywhere in the world created demand for dollars and recycled through the US financial system.
By the time financial deregulation accelerated through the 1980s and 1990s, the architecture was complete. The petrodollar recycling loop — oil priced in dollars, surpluses invested in US Treasuries, dollar demand self-perpetuating — was the engine of American financial hegemony for fifty years. The flywheel, in Dalio’s terms, was turning at full speed.
