Executive Summary
Over the last 2 years, the US dollar has fallen against its major trading partners (chart 1). So, what’s going on with the US dollar and why it matters for Australian Investors?
All currencies are affected by a range of factors both short and long term in nature. Most economists concern themselves with the shorter-term factors that are mostly derived from economic cycles; but what if there are longer term factors that are already in play that will serve to devalue and diminish the US Dollar’s dominance as the world’s default currency?
For nearly eighty years, the United States dollar has functioned as the central pillar of global finance. It dominates trade invoicing, sovereign reserves, capital markets, and foreign exchange transactions (Federal Reserve Board, 2025). This position has afforded the United States significant economic flexibility—often described as “exorbitant privilege”—allowing sustained deficits financed at comparatively low cost (Eichengreen, 2011).
Yet gradual diversification trends are emerging. The dollar’s share of global foreign exchange reserves has declined from over 70% in the early 2000s to approximately 56–58% in 2025 (International Monetary Fund [IMF], 2024). While still dominant, this trajectory reflects structural adjustment rather than collapse.
This edition of the Pacific Navigator evaluates the structural foundations of dollar dominance, historical reserve currency transitions, Treasury market implications, and emerging geopolitical catalysts contributing to a trend away from the USD and toward other safe heavens as part of a diversified approach. Drawing on IMF, BIS, Federal Reserve, and academic research, this paper concludes that the most probable outcome is a gradual shift away from the USD and toward a multipolar reserve currency system rather than sudden US dollar displacement. The paper also discusses what this means for investors and how the implications for duration risk, gold allocation, currency diversification, and volatility management may impact long term strategic asset allocations.
What De-Dollarization Means in Practice
De-dollarization refers to the gradual reduction in reliance on the U.S. dollar in reserves, trade settlement, and financial infrastructure (IMF, 2024). It does not imply immediate displacement.
Before discussing implications, it’s important to clarify what de-dollarization is — and what it is not.
The U.S. dollar remains deeply entrenched in the global system. It represents roughly 56–58% of global foreign exchange reserves (IMF, 2024), and it is involved in nearly 90% of global foreign exchange transactions (Bank for International Settlements, 2022). Those numbers are not consistent with collapse.
What is shifting is the marginal allocation in the following three areas:
- Central banks increasing gold holdings. The chart below to the left shows the dramatic increase in Chinese Reserves of Gold from 2022 and the chart below and to the right shows the USD devaluation against a basket of currencies.
Chart 1. Chart 2.
- Incremental diversification into euros and renminbi
- Expanded bilateral currency swap agreements
What is also shifting is the trajectory:
Over the past two decades, the dollar’s share of reserves has declined from above 70% to the high-50s. That decline is gradual — but persistent. It reflects diversification, not abandonment.
The “dominant currency paradigm” helps explain why the dollar remains sticky (Gopinath et al., 2020). Global trade contracts, commodity pricing, derivatives markets, and corporate hedging structures are overwhelmingly dollar-based. Once embedded, these systems create powerful inertia.
So, what does de-dollarization look like in practice?
- Central banks incrementally increasing gold allocations
- Bilateral trade agreements settled in local currencies
- Gradual diversification toward euros and renminbi
- Development of alternative payment infrastructure
It does not look like a sudden global shift away from the dollar.
For investors, this distinction matters.
Markets do not reprice gradual structural trends in a single event. They reprice them over time — through modest changes in yield levels, volatility regimes, and currency relationships.
The key insight is, De-dollarization is occurring at the margin and will likely pose a head wind for the USD over the long term. This is more about risk management adjustments associated with a structural drift rather than a systemic collapse in the USD.
Historical Precedent: Sterling to Dollar
Reserve currency transitions are slow-moving structural processes. At the beginning of the 20th century, the British pound sterling was the dominant global reserve currency. London was the world’s financial centre. Sterling financed global trade, commodity flows, and capital markets.
Yet by the 1920s, the United States had become the world’s largest creditor nation. Economic gravity was shifting — but sterling dominance did not disappear overnight. It took Two world wars, Major fiscal strain in the U.K, and the institutionalization of the Bretton Woods system before the dollar fully supplanted sterling (Eichengreen, 2011).
The key lesson is that transitions can happen but, they happen slowly and require credible alternatives.
Chinn and Frankel (2007) argue that for a currency to take on global reserve currency status will depend on:
- Financial market depth
- Political stability
- Rule of law
- Convertibility
- Economic size
Even when the U.S. economy surpassed Britain’s, sterling remained influential for decades because network effects are powerful. This resulted in a multipolar currency system.
That has direct implications today.
For the dollar to be meaningfully displaced, an alternative currency must offer:
- Deep sovereign bond markets
- Large-scale derivatives infrastructure
- Legal transparency
- Full capital mobility
The two most likely candidate currencies are the Euro and China’s Renminbi. However, the Euro faces fiscal fragmentation constraints and the Renminbi faces capital control limitations. Neither currently has the same depth in its respective Treasury market. (Eichengreen et al., 2018). Therefore, in the absence of a fully comparable alternative to the USD it is unlikely that we will see a rapid dollar displacement.
For investors, the historical parallel suggests two important conclusions:
- The dollar’s position is structurally resilient.
- Gradual systemic diversification away from the US Dollar does not imply rapid displacement.
What history tells us is that multipolar currency systems often emerge before the dominant legacy currency gets displaced.
From a strategic asset allocation standpoint, this supports a measured approach:
- Incremental currency diversification
- Enduring meaningful gold allocation (mid to high single digits % of overall portfolio)
- Gradual lower demand for US Government bonds, resulting in higher yields and lower prices over the long term.
- However, avoid extreme positioning based on simple binary forecasts. De-dollarisation is incremental and will be a slow burn. History rewards disciplined diversification more than dramatic repositioning.
These and other asset allocation implications are discussed later in the paper.
The importance of the US Treasury Market
The U.S. Treasury market remains the foundation of global finance. It is not simply just another bond market — it is the world’s primary reserve asset pool, collateral backbone, and pricing benchmark (Federal Reserve Board, 2025).
Foreign central banks hold trillions in US Government bonds (Treasuries) as part of their reserves. This steady recycling of global savings back into U.S. Government debt has historically helped suppress long-term borrowing costs to fund US Government deficits.
If de-dollarization continues gradually, the likely impact occurs at the margin — meaning slight-moderate less automatic foreign demand for long-duration Treasuries over time. That does not imply crisis. It implies a regime where long-term yields may become somewhat more sensitive to fiscal dynamics and capital flow shifts. In other words, the US bond market loses some of its automatic stability and becomes more susceptible to normal market influences.
For investors, this has direct implications.
First, if structural foreign demand softens even modestly, then longer dated US Government bonds may see higher yields and lower prices.
Second, we may see an increase in interest rate volatility due to diversification away from US bonds. For years foreign country trade surpluses were invested back into US Bonds, if we see an increase in diversification by foreign countries it means a reduction in automatic buying/demand for US government bonds, which will make them more susceptible to selling pressures and therefore more volatile. Increased volatility will likely mean that investors may require an increased risk premium resulting in higher yields and lower bond prices.
For investors this means, fixed income exposure should be spread across short, intermediate, and longer maturities — commonly referred to as laddering. This reduces timing risk. As bonds mature, capital can be reinvested at prevailing yields, improving flexibility.
Similarly, actively managing duration — adjusting the portfolio’s sensitivity to rate changes rather than leaving it static — becomes more sensible in a structurally evolving environment.
For investors a managed approach involving the following strategies may serve to mitigate the risks discussed above:
- Avoid overconcentration in long dated maturities
- Blend short and intermediate dated maturities
- Be prepared to adjust average bond duration as structural conditions evolve
The Eurodollar System and Global Liquidity
When most investors think about the dollar, they think about the US Federal Reserve. But much of the global dollar system exists outside U.S. borders.
The Eurodollar system refers to offshore dollar deposits and lending that occur outside U.S. regulatory jurisdiction. This shadow liquidity network supports global trade finance, derivatives markets, and commodity hedging.
Helene Rey’s work on the global financial cycle shows that dollar liquidity conditions strongly influence global credit expansion (Rey, 2015). When U.S. dollar funding tightens, all risk premiums adjust affecting almost every asset class.
This is critical for understanding de-dollarization: replacing the dollar is not simply about reserve allocation — it requires replicating this vast liquidity infrastructure that exists beyond the US borders.
To date:
- RMB markets lack comparable derivative depth.
- Euro sovereign fragmentation limits scale.
- Capital controls restrict full convertibility in China.
That means even if countries diversify reserves, global corporate funding remains deeply dollar-dependent.
For investors, the implication is subtle but important:
Dollar liquidity shocks will likely remain a primary driver of global risk cycles for the foreseeable future. De-dollarization may soften the edges over decades — but the dollar’s influence on global credit conditions remains structurally embedded.
Evidence of Gradual Diversification
IMF COFER figures show the dollar’s reserve share has declined gradually to roughly 57% (IMF, 2024). At the same time, central banks have increased gold purchases to multi-decade highs (The Guardian, 2026).
This behaviour is best understood as sovereign portfolio rebalancing. Central banks are not signalling collapse expectations. They are managing geopolitical risk.
Gold, in particular, functions differently than a fiat currency. It is politically neutral, carries no counterparty risk, and cannot be sanctioned. In a more fragmented geopolitical environment, that neutrality has value. This is one reason we continue to favour a gold exposure as part of a long-term asset allocation strategy.
Renminbi allocations have increased modestly, but capital controls limit its full reserve utility. The euro remains the second-largest reserve currency but faces fiscal coordination challenges.
In addition, the marginal unwinding of the petrodollar is further evidence of a gradual diversification away from the USD. Petrodollars are earned for selling oil. The petrodollar system helps sustainUSdollar demand, but it is not a legal obligation forcing all oil trades to be in USD — it’s a de facto market standard backed by liquidity, depth, and trust in U.S. financial markets. More recently Many countries have policies to reduce reliance on the U.S. dollar in trade invoicing and payments. This trend is contributing to de-dollarization. Initiatives like pricing oil in other currencies — e.g., Yuan (“petroyuan”) — are an emerging trend, but currently they remain small relative to the dominant USD oil market.
From an asset allocation perspective:
- Gold’s role becomes more than just an inflation hedge.
- Exposure to metals, energy and broader commodities indices provides exposure to real assets that have intrinsic value and less prone to any unexpected disruption from de-dollarisation.
- Sovereign reserve diversification signals longer-term currency volatility potential.
Geopolitical Catalysts
Currency dominance is as much political as economic. Financial sanctions over the past decade have demonstrated how access to dollar clearing infrastructure can be restricted. That realization has changed sovereign risk calculus (IMF, 2025).
Countries that perceive potential future exposure to sanctions or geopolitical friction have incentives to reduce single-point dependency.
Recent assertive geopolitical positioning by the United States — including strategic rhetoric involving Greenland, trade tensions affecting North American partners, and energy policy leverage — has amplified discussions about financial sovereignty. Importantly, this does not mean allies are abandoning the dollar. It means they are hedging against tail risk.
Historically, geopolitical fragmentation accelerates reserve diversification when credible alternatives exist (Eichengreen et al., 2018).
The critical point for investors is that De-dollarization is not driven by ideology. It is driven by risk management at the sovereign level and so when sovereigns begin to hedge, investors should pay attention.
Capital Market Transmission Channels
If diversification continues over the next decade, the transmission into financial markets is likely to be gradual but meaningful. This is where investors will feel the effects of de-dollarisation.
Foreign exchange markets may experience modest long-term depreciation pressure if structural dollar demand declines. However, it is likely that given the USD is the dominant currency used for global trade invoicing, this should provide sufficient inertia to slow any sharp shifts away from the USD (Gopinath et al., 2020). Investors may wish to consider a gradual shift toward unhedged vs hedged portfolio exposures to reduce USD exposure.
In bond markets, even incremental reductions in foreign Treasury accumulation could increase required term premiums (Federal Reserve Board, 2025). That translates to:
- Higher long-term yields (lower bond prices)
- Greater rate volatility
- Increased sensitivity to fiscal developments
Real assets such as infrastructure and commodities often perform well in more fragmented monetary environments.
Equity markets may see second-order effects. A structurally softer dollar tends to benefit multinational earnings, particularly those with foreign revenue exposure. In general commodity producing companies will have long term structural support from de-dollarisation due to their exposure to the structural rise in underlying commodity prices. Lastly, emerging market equities are also beneficiaries to a weaker USD due to the debt relief from their USD denominated loads and the “risk on” sentiment created by a falling USD.
The broader implication is not dislocation, but modest structural increases in volatility across FX and interest rates markets. For disciplined investors, volatility is not inherently negative but it requires intentional risk budgeting and disciplined asset allocation.
Outlook (2025–2040)
Base Case — Gradual Multipolar Drift
Our base case scenario is for the USD to become less dominant but remain central in the global financial system. We expect the dollar to decline gradually toward ~50% (from current 57%) reserve share by the mid-2030s (IMF, 2024 trend continuation). By contrast we see the euro and renminbi growing gradually in relative importance with multipolar liquidity centres becoming more regionalized. Chart 3 below show the USD diminishing share of global foreign reserves and chart 4 shows the historical pattern of displacement for previous reserve currencies.
Chart 3.
Chart 4.
The asset allocation implications from this scenario will mean:
- Avoiding excessive concentration in ultra-long (10 plus years)-duration sovereign bonds. Blend short/intermediate maturities with tactical long exposure. Consider barbell structures (short + long, avoid middle concentration). Ensure you have a managed duration strategy instead of a static set and forget approach. This isn’t about being short bonds. It’s about recognizing that long duration may behave more cyclically than it did during the 2000–2020 bond bull market and this will provide greater opportunity for a skilled manager to add value.
- Higher interest rate volatility increases the appeal of: Floating-rate instruments, Short-duration credit, and global inflation-linked bonds due to flexibility not necessarily because they are a hedge against inflation.
- Maintaining persistent modest, disciplined gold exposure as a geopolitical hedge
- Incorporating thoughtful currency diversification rather than defaulting to USD-only positioning through a shift to greater unhedged currency positions.
- If volatility is structurally higher, allocating deliberately to Hedge fund strategies that benefit from it makes sense. Examples may include: Global macro strategies, Systematic trend following (rates and FX), Option-writing with discipline, and Long-volatility tail hedges.
- In a multipolar currency world there will likely be greater dispersion in performance between asset classes, equity sectors, interest rate duration, and regions. This dispersion will provide greater opportunity for skilful managers to outperform. In such an environment active management should be preferred over passive strategies.
- Likely greater dispersion between country and regional economic performance and consequently allocating specifically to countries instead of simply allocating to a pool of global equities may provide increased tactical opportunities.
- Real assets gain structural relevance because they respond to physical supply/demand — not just liquidity. As a consequence, an allocation to commodities and infrastructure will provide greater tactical opportunities.
- Currency positions may offer genuine alternative return opportunities through systemic exposures and serve as more than just a hedging function. Carry trades and volatility opportunities can be exploited by experienced and skilful currency hedge fund managers.
Top of Form
Bottom of Form
Conclusion
We are witnessing the emergence of a gradual and evolving De-dollarization that will likely take several decades to play out. The U.S. dollar remains the dominant reserve currency, the deepest capital market anchor, and the primary driver of global liquidity (Federal Reserve Board, 2025; IMF, 2024). No credible single replacement currency currently matches its scale, convertibility, or financial depth.
However, structural trends matter — especially when they originate at the sovereign level. Over the past two decades, the dollar’s share of global reserves has declined gradually. Central banks have increased allocations to gold and diversified incrementally into other currencies. These are not tactical shifts. They are long-horizon, balance-sheet decisions.
Managers of Sovereign reserves move slowly. They do not reposition based on headlines or speculation. They hedge concentration risk early, before it becomes disorderly. When sovereigns diversify, they are not predicting crisis — they are managing regime uncertainty. Long-term private capital should approach this development with similar discipline of thoughtful adaptation.
If sovereign demand for US Treasuries becomes incrementally less automatic, duration management becomes more important. If reserve diversification increases FX dispersion, currency exposure becomes a structural portfolio variable rather than an afterthought. If geopolitical fragmentation raises the value of real assets because of their neutrality then gold and select real assets gain structural relevance beyond tactical inflation hedging.
Sovereign nations hedging away their concentration risk to the USD is a strong signal that shouldn’t be ignored. However, it should be interpreted proportionally. The disciplined approach lies in recognizing structural drift without overreacting to it. The dollar’s era is not ending just yet, It is evolving and with this comes opportunity.
References
Bank for International Settlements. (2022). Triennial central bank survey of foreign exchange and over-the-counter derivatives markets.
Chinn, M. D., & Frankel, J. A. (2007). Will the euro eventually surpass the dollar as leading international reserve currency?
Eichengreen, B. (2011). Exorbitant privilege: The rise and fall of the dollar.
Eichengreen, B., Mehl, A., & Chiţu, L. (2018). How global currencies work.
Federal Reserve Board. (2025). The international role of the U.S. dollar.
Gopinath, G., et al. (2020). Dominant currency paradigm. American Economic Review.
International Monetary Fund. (2024). Currency composition of official foreign exchange reserves (COFER).
International Monetary Fund. (2025). Dollar dominance in the international reserve system: An update.
Rey, H. (2015). Dilemma not trilemma: The global financial cycle. NBER Working Paper.
South Centre. (2023). Trends, reasons, and prospects of de-dollarization.
The Guardian. (2026). Central banks increase gold holdings amid dollar credibility concerns.