Currency markets rarely change overnight, yet concerns about the future of the US dollar keep growing. But what happens if confidence in the world’s leading currency starts to fade?
Barry Eichengreen, a former senior adviser at the International Monetary Fund (IMF), believes the global monetary system faces mounting risks, but he does not think the world can repeat the coordinated response seen in 1985.
Coordination looks impossible
During an online economic lecture, he explained that today’s central banks are mainly focused on domestic goals like controlling inflation and supporting employment, leaving little room for the kind of joint currency intervention used decades ago.
Back then, the Plaza Accord brought the United States and several major economies together to weaken the US dollar through coordinated action. These days, Eichengreen argued, countries have very different economic priorities, making that level of cooperation far harder to achieve.
Rather than expecting another global agreement, he sees the financial system slowly evolving into a more multipolar one where several major currencies play larger international roles. Even so, he warned that the transition could become chaotic if confidence in the dollar weakens before reliable alternatives are fully established.
No easy dollar replacement
Among the biggest risks, Eichengreen pointed to rising US government debt, concerns about the Federal Reserve’s independence, financial deregulation, tariffs, and weakening geopolitical alliances. Should those trends continue under President Donald Trump and future administrations for another decade, he estimated the chances of a confidence crisis in the dollar could climb above 50%.
Although talk of “de-dollarisation” has become more common, Eichengreen said neither the euro nor China’s yuan is ready to replace the dollar as the world’s leading reserve currency. Both could gain a larger role over time, but that process is likely to unfold gradually.
Finally, he rejected the idea that China would dump its massive holdings of US Treasury bonds to pressure Washington. Why? Doing so would shake global financial markets and damage China’s own economy, making a steady and orderly transition the better outcome for everyone.
