The Dollar’s Durability Hinges on Geopolitics, Not Economics
As sanctions test reserve currency status, economist Barry Eichengreen argues the greenback's future depends on strategic reliability—a framework sterling's collapse validates.
The dollar’s share of global foreign exchange reserves fell to 56.92% in Q3 2025, the lowest since 1994, yet the currency’s dominance may face greater threat from weaponized sanctions than from economic fundamentals. According to IMF data released in December, this marks a 14-percentage-point decline from the dollar’s 71% share at the turn of the millennium, driven not by the rise of major alternatives but by gradual diversification into smaller currencies and gold.
Barry Eichengreen, economist at UC Berkeley, argues in recent research that international currency status depends less on GDP shares or trade volumes than on geopolitical reliability. Writing in February 2026, Eichengreen emphasizes that “international currency status rests on the strength of the issuing country’s commercial and financial links with the rest of the world—but also has political foundations.” Those foundations include separation of powers, rule of law, and critically, “the issuer’s ability to forge and maintain durable geopolitical alliances, since countries hold and use the currencies of their alliance partners.”
The Sanctions Paradox
The Ukraine conflict crystallized the dilemma. Western allies froze roughly $300 billion in Russian central bank reserves—equivalent to 35% of Russian GDP—and severed major banks from the SWIFT payment system following the February 2022 invasion. While unprecedented in scale against a major power, such measures followed a pattern: Afghanistan, Iran, Venezuela, and Cuba had all faced similar financial exclusion.
The result: nearly 90% of Russia-China trade now settles in yuan or rubles, bypassing the dollar entirely, according to OANDA research. Russian officials at the October 2024 BRICS summit in Kazan claimed 90% of settlements among BRICS nations now use national currencies. China’s Cross-Border Interbank Payment System (CIPS) has expanded to 1,467 participants across 119 countries as of January 2025, providing yuan-based transaction infrastructure independent of SWIFT.
“The biggest threat to the dollar’s power is the one-sided misuse of financial Sanctions. By continuously applying this strong financial pressure, the US naturally weakens the key advantages, like reliability and political neutrality, that originally attracted the world’s money to the dollar system.”
— OANDA analysis, November 2025
Yet the IMF notes that statistical tests “do not indicate an accelerating decline in the dollar’s reserve share, contrary to claims that US financial sanctions have accelerated movement away from the greenback.” The 149 economies reporting to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) database represent 93% of global FX reserves, suggesting non-reporters seeking to escape dollar exposure remain a negligible share.
Sterling’s Long Goodbye
Historical precedent offers cold comfort. The pound sterling’s decline from global reserve currency took decades, not years, constrained by institutional inertia and the absence of credible alternatives. By 1928, sterling still accounted for twice the central bank reserves of the dollar, according to European Central Bank research, despite the United States having overtaken Britain as the world’s largest economy in the 1870s.
The true inflection point came not from economic metrics but geopolitical stress. World War I shattered Britain’s financial dominance, yet the Federal Reserve’s support for sterling and the 1925 return to gold at the prewar parity of $4.86 temporarily stabilized the system. The 1931 sterling crisis—when Britain abandoned gold following speculative attacks—marked the currency’s irreversible decline. By 1950, sterling’s share of global reserves had plummeted from 81% in 1945 to 58%, according to historical data compiled by Cambridge researchers.
Britain’s attempts to preserve sterling’s status through imperial coercion—threatening sanctions and capital controls on Commonwealth nations seeking to diversify reserves—ultimately failed. Research published in the Journal of Economic History describes sterling as a “zombie international currency” after 1945, surviving only in the “captive market” of the sterling area through “international blackmail, propaganda, and economic sanctions.”
BRICS De-Dollarization: Rhetoric vs. Reality
BRICS nations have amplified de-dollarization rhetoric since Russia’s financial exclusion, yet concrete progress toward a shared currency remains elusive. The July 2025 BRICS summit in Rio de Janeiro produced no mention of a common currency in its final declaration, according to trade policy analysts. Brazilian President Lula, once a vocal advocate for a BRICS currency, quietly dropped the proposal from Brazil’s 2025 presidency agenda following President Trump’s threat of 100% tariffs on nations backing dollar alternatives.
Even Vladimir Putin, who displayed what appeared to be a prototype BRICS banknote at the October 2024 Kazan summit, stated in November 2024 that Russia was “not seeking to abandon the dollar.” The apparent reversal reflects pragmatic calculation: challenging dollar supremacy invites economic consequences few rising powers are prepared to face.
| Initiative | Status | Scale |
|---|---|---|
| BRICS Common Currency | Abandoned (2025) | — |
| Local Currency Trade | Active | 90% Russia-China bilateral |
| CIPS Payment System | Operational | 1,467 participants, 119 countries |
| Gold Accumulation | Accelerating | China: 2,304 tonnes ($283bn) |
| New Development Bank | Limited impact | Local currency lending expanding |
The renminbi’s reserve share actually declined from 2.12% in Q1 2025 to 1.93% in Q3 2025, according to IMF data, undermined by capital controls and Beijing’s reluctance to liberalize financial markets. A National Bureau of Economic Research paper notes that “countries traditionally hold the reserves of their alliance partners,” and recent UN voting patterns show renminbi adoption concentrated among nations geopolitically aligned with China rather than the West.
The Conflict Zone Paradox
Perhaps most striking is dollar demand’s resilience in the very conflict zones where U.S. sanctions have been most aggressive. In Ukraine, dollar usage for humanitarian transactions and reconstruction finance remains dominant despite the country’s pivot toward European integration. Israel continues to receive military aid denominated in dollars—$17.9 billion in the year following October 2023, the highest annual total ever, according to Brown University’s Watson Institute.
Global conflict zones have expanded by two-thirds since 2021, covering 6 million square kilometers and displacing over 120 million people by April 2024, according to Verisk Maplecroft. Yet humanitarian operations, reconstruction finance, and arms transactions in these zones continue to rely overwhelmingly on dollar-denominated instruments—a testament to the currency’s unmatched liquidity and the absence of viable alternatives at scale.
The 1944 Bretton Woods system pegged foreign currencies to the dollar at fixed rates, with the dollar convertible to gold at $35 per ounce. By the 1960s, U.S. overseas spending exceeded gold reserves, creating the “Triffin dilemma”—the system required dollar outflows to provide global liquidity, but those outflows undermined confidence in dollar-gold convertibility. Nixon closed the gold window on August 15, 1971, ending convertibility and ushering in the era of floating exchange rates formalized by the 1976 Jamaica Accords.
Economic Fundamentals Still Matter
While Eichengreen emphasizes Geopolitics, economic factors retain explanatory power. The dollar’s 58% reserve share still far exceeds the U.S. share of global GDP (around 25%) or trade (roughly 11%), according to Federal Reserve analysis published in July 2025. The euro comprises 20% of reserves despite the eurozone representing a comparable economic footprint, constrained by fragmented sovereign debt markets and memories of the 2010-2014 debt crisis.
Liquidity remains the dollar’s decisive advantage. U.S. Treasury markets are the deepest and most liquid globally, with daily trading volumes dwarfing alternatives. The dollar’s role in 88% of foreign exchange transactions and 54% of export invoicing creates self-reinforcing network effects. Even central banks seeking to diversify face limited options: gold has surged to 23% of official reserve assets as of 2024, but this largely reflects price appreciation rather than physical accumulation, according to Federal Reserve research.
- Dollar reserves fell to 56.92% in Q3 2025, lowest since 1994, but decline remains gradual rather than precipitous.
- Eichengreen argues geopolitical reliability—alliance durability and rule of law—matters more than GDP shares for reserve currency status.
- Sterling’s 50-year decline from dominance validates the slow-motion nature of reserve currency transitions, absent major systemic shocks.
- Russia-China trade now 90% settled in local currencies, yet statistical tests show no acceleration in global de-dollarization.
- BRICS common currency plans abandoned in 2025 following U.S. tariff threats; renminbi reserve share actually declined to 1.93%.
- Dollar usage persists in conflict zones (Ukraine, Gaza) for humanitarian and military transactions despite sanctions weaponization concerns.
What to Watch
The dollar’s trajectory depends on three variables: U.S. fiscal sustainability, the evolution of alternative payment systems, and crucially, Washington’s willingness to use financial exclusion as a foreign policy tool. Persistent federal deficits—the Congressional Budget Office projects debt-to-GDP ratios exceeding 180% by 2055—could eventually undermine confidence, though predictions of imminent dollar collapse have consistently proven premature.
The expansion of China’s CIPS, BRICS payment infrastructure, and central bank digital currencies (CBDCs) creates technical alternatives to dollar-denominated finance. Yet technical capacity differs from adoption at scale. As Eichengreen notes, “the complexity of recreating the whole ecosystem in a different currency renders a regime change unlikely.” The dollar’s reserve share declined by just 10 percentage points over 22 years—a glacial pace suggesting decades, not years, before any fundamental shift.
The most immediate risk remains self-inflicted: excessive sanctions deployment that persuades even allied nations to hedge dollar exposure. European officials, spooked by the aggressive use of financial warfare against Russia, have discussed creating payment systems independent of U.S. infrastructure. French President Emmanuel Macron warned in 2023 that Europe must reduce dependence on the dollar to avoid becoming “American vassals.”
History suggests reserve currency transitions unfold across generations, not election cycles. Sterling’s decline took six decades; the dollar overtook sterling in the 1920s but required World War II to cement dominance. Absent a comparable systemic shock—a catastrophic U.S. debt crisis, hyperinflation, or geopolitical fracture—the dollar’s “exorbitant privilege” appears secure for the foreseeable future. The question is whether policymakers will squander that privilege through financial overreach before economic fundamentals force a reckoning.