Thank you! And I think it was the 1890s when the US surpassed the UK in trade and GDP! Transitions are glacial and the US dollar’s position is still strong.
Really great outline of foreign currency transactions and why central banks holding more gold doesn't necessarily mean USD dominance is going to decline. Found it interesting the point about the GBP taking decades to decline even after UK political/military dominance eroded more quickly.
Thank you so much! Yes! I have always found that fascinating. It took over 50 years after the US became the largest economy and two world wars for the USD to cement its role as the dominant currency.
It's a really good point - makes you wonder if the opposite could work as well. How long before USD erodes after the US political/military influence has eroded.
This is the most honest framework I've seen for diagnosing dollar dominance - and exactly the right one to apply to what's happening right now.
Your distinction between the three roles matters enormously, because the threat to the dollar isn't coming through reserves. You're right that reserve erosion is slow and that gold isn't a transacting currency. The threat is coming through the vehicle currency role - the one you identify as most durable.
Here's the mechanism: USD1 doesn't need to displace the dollar globally to become dangerous. It only needs to capture specific high-volume corridors. Energy contracts in the Gulf. Institutional settlements between sovereign wealth funds. Trade invoicing in markets where the U.S. has offered regulatory or diplomatic incentives for USD1 adoption.
The $2 billion UAE-Binance deal settled in USD1. Witkoff - who holds direct financial stakes in World Liberty Financial, the issuer of USD1 -is simultaneously America's chief diplomatic negotiator in the Middle East. His son has signed sovereign MOUs. Every oil-producing state is a potential node in a system where the vehicle currency for energy is no longer the public dollar but a privately owned one.
You note that network effects are self-reinforcing: the more a currency intermediates transactions, the deeper its markets, the lower its transaction costs. That's true. But network effects can also be captured - not by volume alone, but by regulatory architecture. The GENIUS Act, the CLARITY Act, and the Anti-CBDC bill together form a legal framework designed to give USD1 privileged access to U.S. banking infrastructure while blocking any public digital dollar alternative.
This isn't a rival currency emerging through market competition. It's a private stablecoin being legislated into the vehicle currency role from the inside.
The Gopinath-Stein loop you describe - trade invoiced in dollars creates demand for safe dollar assets, which lowers borrowing costs, which reinforces invoicing - still holds. But ask who captures the seigniorage if the invoicing currency is USD1 rather than the public dollar. The answer is: 75% flows to Trump and Witkoff family entities.
The dollar's dominance may be more durable than the reserve-watchers think. But the question of who owns the dominant dollar is changing in real time.
Thank you so much for the comment! I very much agree that while stablecoins create demand for safe dollar assets, the issue of control (i.e. dollars we see and dollars we don't) is an open question as the stablecoin ecosystem develops.
What does the last chart (reserves share) look like if we adjust for the fact that gold prices are up about 140% since the Ukraine war while the Bloomberg 7-10 Year UST index (80-90% of foreign holdings of treasury securities held as reserves are in bonds and notes, not bills) is down about 5.5% over the same period? Have to assume both the decline in the USD share and surge in the gold share end up significantly pared back…
Hi Jorge! Thanks for the comment! This chart account for gold at market prices. I used reserves and gold at market prices from the IMF's International Financial Statistics. I suspect you are right that if we remade the chart with gold at SDR values the percentages would change.
Really enjoyed this great piece! The continued dominance of USD in global trade makes so much sense with your framing. With that, I'm curious whether you think a CIPS connector to SWIFT (or even SPFS to CIPS to SWIFT) will actually take hold, or whether that just reinforces your point on dollar dependency at the correspondent layer?
Hi Zachary! Thank you for the comment. From what I understand, CIPS already uses SWIFT for indirect connections so that linkage already exists. Hypothetically, if CIPS, which right now clears RMB and HKD, expanded coverage to include USD they could possible add one of the large Chinese banks as the dollar clearer (like HSBC and CHATS), which could create additional layers between dollar clearing and the US financial system. As so far as switching trade to another currency because of better infrastructure, I think we are already seeing that. CIPS IMHO is one of the major reasons why the RMB has been able to increase its role in bilateral trade settlement. I think the next indicator will be if we start to see RMB act as a vehicle currency and not just a settlement asset where one leg of the trade is Chinese.
A wonderful exposition.
It took 30 years 1915 to 1945 for GBP to USD - people forget this, yes.
The US-CN 10Y differential will drive trade financing especially in the Global South. Everyone trades with China and 300 bppa is not to be sneezed at.
Thank you! And I think it was the 1890s when the US surpassed the UK in trade and GDP! Transitions are glacial and the US dollar’s position is still strong.
Really great outline of foreign currency transactions and why central banks holding more gold doesn't necessarily mean USD dominance is going to decline. Found it interesting the point about the GBP taking decades to decline even after UK political/military dominance eroded more quickly.
Thank you so much! Yes! I have always found that fascinating. It took over 50 years after the US became the largest economy and two world wars for the USD to cement its role as the dominant currency.
It's a really good point - makes you wonder if the opposite could work as well. How long before USD erodes after the US political/military influence has eroded.
Fair question. The US is still about $12 T larger than China, so we have some time even as signs of multipolarity arise.
This is the most honest framework I've seen for diagnosing dollar dominance - and exactly the right one to apply to what's happening right now.
Your distinction between the three roles matters enormously, because the threat to the dollar isn't coming through reserves. You're right that reserve erosion is slow and that gold isn't a transacting currency. The threat is coming through the vehicle currency role - the one you identify as most durable.
Here's the mechanism: USD1 doesn't need to displace the dollar globally to become dangerous. It only needs to capture specific high-volume corridors. Energy contracts in the Gulf. Institutional settlements between sovereign wealth funds. Trade invoicing in markets where the U.S. has offered regulatory or diplomatic incentives for USD1 adoption.
The $2 billion UAE-Binance deal settled in USD1. Witkoff - who holds direct financial stakes in World Liberty Financial, the issuer of USD1 -is simultaneously America's chief diplomatic negotiator in the Middle East. His son has signed sovereign MOUs. Every oil-producing state is a potential node in a system where the vehicle currency for energy is no longer the public dollar but a privately owned one.
You note that network effects are self-reinforcing: the more a currency intermediates transactions, the deeper its markets, the lower its transaction costs. That's true. But network effects can also be captured - not by volume alone, but by regulatory architecture. The GENIUS Act, the CLARITY Act, and the Anti-CBDC bill together form a legal framework designed to give USD1 privileged access to U.S. banking infrastructure while blocking any public digital dollar alternative.
This isn't a rival currency emerging through market competition. It's a private stablecoin being legislated into the vehicle currency role from the inside.
The Gopinath-Stein loop you describe - trade invoiced in dollars creates demand for safe dollar assets, which lowers borrowing costs, which reinforces invoicing - still holds. But ask who captures the seigniorage if the invoicing currency is USD1 rather than the public dollar. The answer is: 75% flows to Trump and Witkoff family entities.
The dollar's dominance may be more durable than the reserve-watchers think. But the question of who owns the dominant dollar is changing in real time.
Thank you so much for the comment! I very much agree that while stablecoins create demand for safe dollar assets, the issue of control (i.e. dollars we see and dollars we don't) is an open question as the stablecoin ecosystem develops.
What does the last chart (reserves share) look like if we adjust for the fact that gold prices are up about 140% since the Ukraine war while the Bloomberg 7-10 Year UST index (80-90% of foreign holdings of treasury securities held as reserves are in bonds and notes, not bills) is down about 5.5% over the same period? Have to assume both the decline in the USD share and surge in the gold share end up significantly pared back…
Hi Jorge! Thanks for the comment! This chart account for gold at market prices. I used reserves and gold at market prices from the IMF's International Financial Statistics. I suspect you are right that if we remade the chart with gold at SDR values the percentages would change.
Appreciate the reply Jess!
Really enjoyed this great piece! The continued dominance of USD in global trade makes so much sense with your framing. With that, I'm curious whether you think a CIPS connector to SWIFT (or even SPFS to CIPS to SWIFT) will actually take hold, or whether that just reinforces your point on dollar dependency at the correspondent layer?
Hi Zachary! Thank you for the comment. From what I understand, CIPS already uses SWIFT for indirect connections so that linkage already exists. Hypothetically, if CIPS, which right now clears RMB and HKD, expanded coverage to include USD they could possible add one of the large Chinese banks as the dollar clearer (like HSBC and CHATS), which could create additional layers between dollar clearing and the US financial system. As so far as switching trade to another currency because of better infrastructure, I think we are already seeing that. CIPS IMHO is one of the major reasons why the RMB has been able to increase its role in bilateral trade settlement. I think the next indicator will be if we start to see RMB act as a vehicle currency and not just a settlement asset where one leg of the trade is Chinese.