Transcription
Right now, somewhere in Lagos, a trader is buying oil. He's Nigerian, the oil is Saudi, the ship is flagged in Panama, and the money that changes hands isn't naira, isn't riyals, isn't the Panamanian balboa. It's dollars, American dollars, printed by a country that has nothing to do with this transaction at all.
Why? Why does a currency issued by one government, backed by one economy, keep showing up in the middle of deals between countries that aren't even speaking to Washington? Why? Every time there's a war, a pandemic, a financial panic anywhere on Earth, does the whole planet rush toward the dollar like it's the only life raft in the ocean, instead of running away from the country that's usually causing half the chaos?
I've had students ask me this for 15 years. Smart students, students who've read the headlines about America's debt, about de-dollarization, about BRICS nations plotting their escape from the dollar system. And every year, I tell them the same thing. The dollar isn't dominant because America is trusted, it's dominant because there's no functioning alternative, and building one is far harder than anyone wants to admit.
Today, I want to walk you through exactly why. Not the textbook version, the real version, the one with the plumbing exposed, the wires showing, the parts nobody wants to talk about because they're inconvenient for whichever narrative you're trying to sell. My name is Jangsheng Zwichin, and I've spent my career studying how power actually moves through the global economy, not how politicians describe it, but how it functions in practice. And nothing reveals more about real power than money. So, let's get into it.
Start with a simple fact. About 88% of all foreign exchange transactions on Earth involve the US dollar on one side of the trade. Not half, not a plurality, 88%. That number has barely moved in 20 years, despite two financial crises, a trade war, sanctions fights, and constant predictions of dollar collapse. Think about what that actually means. If a company in Brazil wants to buy machine parts from Vietnam, odds are the deal is priced in dollars. The payment moves through dollar clearing systems, and somewhere in that chain, an American bank touches the transaction, even though no American is buying or selling anything.
This is what economists call a network effect, and it's the single most important concept for understanding dollar dominance. A currency becomes useful, not because it's inherently better, but because everyone else is already using it. It's the same logic that keeps you on the same social media platform as your friends, even if a better app exists. The app isn't valuable in isolation. It's valuable because of who else is there. Money works the same way, except the stakes are trillions of dollars and entire national economies.
If you're a trader in Jakarta, and you want to sell rubber to a buyer in Rotterdam, you don't ask what currency reflects our two countries' economic relationship. You ask, what currency will my counterpart definitely accept that I can definitely convert into anything else I need, anywhere in the world, at a moment's notice? The answer, for 80 years running, has been the dollar. And once a currency wins that game, it becomes brutally difficult to dislodge, because switching costs are enormous, and the benefits only kick in if a critical mass switches together. Nobody wants to be the first company to price contracts in yuan if nobody else is doing it yet. That's the trap. That's the moat.
Let's talk about oil, because oil is where this story gets its clearest illustration. In the early 1970s, the United States made a deal with Saudi Arabia that would shape the next 50 years of global finance. The details were quiet, unglamorous, and utterly consequential. Saudi Arabia would price its oil exports exclusively in dollars, and in exchange, the US would provide military protection and arms sales to the kingdom. This wasn't charity on Washington's part. It was a master stroke.
Oil is the one commodity every country on Earth needs, regardless of ideology, regardless of who's in power, regardless of whether they like the United States. Food, factories, transportation, electricity, all of it, at some layer, runs through oil. By tying the world's most essential commodity to the dollar, the United States created permanent, structural demand for its own currency that had nothing to do with trust, alliance, or affection.
If you're the finance minister of a country that imports oil, and most countries do, you need dollars. Not because you love America, because you need diesel for your trucks and jet fuel for your planes, and the seller wants dollars. So, you build up dollar reserves. So, your central bank holds dollar assets. So, your banking system runs on dollar infrastructure. All of it cascades from that one arrangement made half a century ago.
This system is often called the petrodollar, and it's been declared dead more times than I can count. Every few years, there's a headline, "Saudi Arabia will accept yuan for oil. The petrodollar is collapsing." And each time, the actual shift has been marginal. A side deal here, a bilateral arrangement there, while the overwhelming majority of global oil trade continues to clear in dollars. The habit is deep. The infrastructure built around it, insurance contracts, shipping documentation, futures markets, refinery agreements, all of it was built assuming dollar pricing and unwinding that isn't a policy announcement. It's decades of institutional rewiring.
Here's something people miss when they talk about currency dominance. It isn't only about trade. It's about where you can safely park enormous amounts of money. Imagine you're a sovereign wealth fund in Norway or a central bank in Japan or an insurance company in Germany. You have hundreds of billions of dollars sitting around and you need somewhere to put it, somewhere liquid, meaning you can buy and sell huge quantities without moving the price against yourself, and somewhere safe, meaning the government backing that asset isn't going to default or collapse.
There is exactly one market on Earth deep enough and liquid enough to absorb that kind of money without blinking. The US Treasury market. It's the largest, most liquid bond market in the history of finance. You can buy or sell tens of billions of dollars of US government debt in a single day without materially moving prices. No other government bond market comes close. Not German bonds, not Japanese government bonds, certainly not Chinese government debt, which remains tightly controlled and difficult for foreigners to move in and out of freely.
This liquidity is not a small technical detail. It's the entire reason dollar reserves work. A currency reserve is useless if you can't actually convert it into something else when you need to. China could, in theory, ask the world to hold yuan reserves instead of dollars, but where would those yuan actually go? Chinese capital markets are still walled off, subject to capital controls, and the government retains enormous discretionary power over currency movements. No sovereign wealth fund manager wants to hold a trillion dollars in an asset they might not be able to sell tomorrow because Beijing decided to tighten capital flows.
The dollar's dominance, in other words, isn't just about America's economic size. It's about the depth, openness, and predictability of American capital markets. Markets built on rule of law, enforceable contracts, and courts that, whatever their flaws, function independently of the executive branch. That combination doesn't exist anywhere else at the same scale. Not in Europe, which lacks a single unified bond market. Not in China, where the legal system answers to the party. Not in any emerging economy, where currency volatility alone disqualifies them from reserve status.
Now, let's go underneath the surface, into the actual infrastructure that makes global dollar transactions possible. Because this is where dollar power becomes something closer to control. Almost every international dollar transaction eventually touches the US financial system, even if neither party involved is American. Why? Because of something called correspondent banking.
When a bank in Turkey wants to send dollars to a bank in Indonesia, it typically routes that payment through a US bank that holds the actual dollar accounts. Because ultimately, dollars are dollars, and someone has to clear that transaction against the real ledger, which sits within the American banking system. This is the mechanism behind US financial sanctions, and it's arguably the most politically significant consequence of dollar dominance.
When the United States sanctions a country or an individual, it doesn't need to physically seize anything. It simply tells American banks, and by extension, any bank that wants to keep doing dollar business, that they cannot process transactions connected to the sanctioned party. Because so much of world trade eventually needs to clear in dollars, this single lever gives Washington the ability to cut entire countries out of the global financial system.
We've seen this play out dramatically. Iran, North Korea, Russia, after the invasion of Ukraine, when major Russian banks were removed from Swift, the messaging system banks use to coordinate international payments, and the Russian Central Bank had a significant portion of its dollar and euro reserves frozen almost overnight. That single event, freezing a major power's reserves, sent a signal to finance ministries everywhere. If you keep your reserves primarily in dollars, and you ever end up on the wrong side of Washington, those reserves can become frozen numbers on a screen, completely inaccessible, regardless of how much you technically own.
This is the paradox at the center of dollar dominance today. The same feature that makes the dollar so powerful, its centrality to global finance, is exactly what makes some countries desperate to reduce their dependence on it. China has been quietly diversifying its reserves for years. Russia dumped much of its dollar-denominated assets before the invasion, anticipating exactly this kind of sanction. Countries like India, Brazil, and several Gulf states have experimented with bilateral trade agreements that bypass dollar clearing entirely.
And yet, and this is the crucial point, none of this has produced an alternative system at scale. Diversifying away from dollars is not the same thing as building a replacement reserve currency. You can reduce your dollar holdings from 70% to 50% of your reserves. That's diversification. It is not the end of dollar dominance. It's risk management within a system that still fundamentally revolves around the dollar.
People often ask, "What about the euro? Doesn't the European Union have a big enough economy, a strong enough currency to challenge the dollar?" On paper, yes. In practice, the euro has never come close. And the reason reveals something important about what reserve currency status actually requires.
The euro is not backed by a single government. It's backed by 19 different governments with 19 different fiscal policies, 19 different bond markets, and crucially, no single unified euro bond that functions the way US Treasuries do. When you buy a US Treasury bond, you're buying debt backed by the full faith and credit of one government with one clear line of political accountability. When you try to buy European debt, you're actually choosing between German bonds, French bonds, Italian bonds, Spanish bonds, each with different risk profiles, different yields, different political risk attached.
This fragmentation became brutally visible during the European debt crisis of the early 2010s when Greek, Portuguese, and Italian bonds nearly collapsed in value while German bonds remained rock solid, all within the same currency union. That crisis exposed for anyone still unsure that the eurozone doesn't have a single unified capital market the way the United States does. It has a currency union sitting on top of fragmented fiscal sovereignty, and international investors noticed. A reserve currency needs one thing above all, a single sovereign backstop that the entire world trusts to honor its debts under one predictable legal and political system. Europe, for all its economic weight, doesn't have that. It has a committee. And committees, however well-intentioned, don't inspire the kind of unconditional trust that reserve currency status demands.
The yuan problem now to the currency everyone actually wants to talk about, the Chinese yuan. China is the world's largest trading nation by volume. It's the manufacturing base for half the planet. If economic size alone determined reserve currency status, the yuan should already be a dominant global currency. It isn't, and understanding why is essential to understanding why the dollar's position is so much more durable than people assume.
The core issue is capital controls. China restricts how much money can flow in and out of its borders, and it restricts the yuan's exchange rate from floating freely according to market forces. This isn't a minor technical policy. It's a fundamental pillar of how the Chinese economic model works, giving Beijing control over capital flows, currency stability, and monetary policy simultaneously. But that same control makes the yuan fundamentally unsuitable as a global reserve currency, at least in its current form.
A reserve currency has to be freely convertible, meaning any central bank or investor anywhere in the world can buy or sell it without asking anyone's permission at the price set by the market rather than by government decree. The yuan doesn't work that way. If you're a central bank considering holding yuan reserves, you have to accept that Beijing could, at any point, tighten capital controls, adjust the exchange rate by fiat, or restrict your ability to convert those yuan back into other currencies if it serves China's domestic economic interests. This isn't a hypothetical risk. It's happened. China has tightened and loosened capital controls repeatedly over the past two decades, always in service of domestic economic priorities, never in service of being a reliable global reserve currency. And that's a rational choice for China's government given its own priorities, but it means the yuan cannot simultaneously serve two masters. It can't be a tool of domestic economic control and a fully trusted, freely convertible global reserve asset at the same time. China would have to give up significant domestic economic control to make the yuan globally dominant. And so far, it has consistently chosen control over global currency ambitions.
There's also the matter of legal predictability. When international investors hold dollar assets, they know that contract disputes, property rights, and financial regulations will be a judicated by courts operating under centuries of established common law precedent, largely independent of political interference. China's legal system, by contrast, remains ultimately subordinate to the Communist Party's authority. For investors deciding where to park billions of dollars for decades, that difference in legal predictability matters enormously, arguably as much as any economic metric.
None of this means China isn't trying. The country has built new payment systems designed to bypass dollar clearing. It's pushed for yuan-denominated oil contracts with select trading partners. It's expanded currency swap lines with dozens of countries. These efforts matter, and they're chipping away at the margins. But chipping away at the margins is very different from displacing eight decades of entrenched infrastructure, trust, and habit.
The exorbitant privilege and its price. There's a phrase French officials coined decades ago that's become famous in economic circles, America's exorbitant privilege. It refers to the unique benefits the United States gets simply from issuing the world's reserve currency. Because the world wants dollars, the US government can borrow money more cheaply than almost any other country on Earth. Because so much global trade is priced in dollars, American companies face less currency risk than their foreign competitors. Because the world holds vast dollar reserves, the US can run persistent trade deficits without triggering the kind of currency crises that would almost any other nation attempting the same thing.
Imagine if any other country tried to import far more than it exports year after year for decades, funded by simply issuing more of its own currency denominated debt. Most countries attempting that would see their currency collapse, their interest rates spike, and their access to international credit dry up almost immediately. The United States has run this exact playbook for decades, and the world keeps buying its debt anyway because that debt, priced in the reserve currency, backed by the deepest capital market on the planet, remains the safest large-scale asset available.
But privilege has a cost, and it's one economists have debated for years under the name of the Triffin dilemma, named after the economist who first identified it in the 1960s. Here's the paradox. For the dollar to serve as the world's reserve currency, the rest of the world needs a steady supply of dollars to hold as reserves. But the only way dollars flow out into the world in large enough quantities is if the United States runs persistent trade deficits, meaning it imports more than it exports, sending dollars abroad in exchange for foreign goods. In other words, the very mechanism that makes the dollar globally available is the same mechanism that hollows out American manufacturing competitiveness over time. The world needs America to keep buying more than it sells, and doing so, decade after decade, has real economic consequences at home. Deindustrialization in certain sectors, structural trade imbalances, and a permanent tension between domestic economic interests and the demands of reserve currency status.
This is worth sitting with because it complicates the simple story of American dominance. The dollar's global status isn't a pure gift. It comes bundled with real structural costs that show up in domestic politics, in debates over manufacturing jobs, trade deficits, and offshoring, precisely because reserve currency status requires a constant outward flow of dollars that has to come from somewhere.
The dedollarization debate, honestly examined. I want to be fair to the other side of this argument because there are real signals worth taking seriously, even if I don't think they add up to imminent dollar collapse. The dollar's share of global central bank reserves has, in fact, declined over the past two decades, from around 70% in the early 2000s to somewhere in the low 50% range more recently. That's a real trend, not a myth. Central banks have been diversifying into other currencies: the euro, the yen, the Australian dollar, gold, and increasingly the yuan. BRICS nations, Brazil, Russia, India, China, South Africa, and the group's expanding membership, have discussed creating alternative payment systems and even, more ambitiously, a shared BRICS currency for trade settlement. Russia and China have significantly increased trade settled in rubles and yuan since 2022, largely driven by sanctions cutting Russia off from dollar-based systems.
These are genuine developments, and anyone telling you dollar dominance is permanent and unchangeable is oversimplifying just as much as anyone predicting its imminent collapse. Currency systems do shift over long historical arcs. The British pound sterling was the unquestioned global reserve currency for over a century before the dollar displaced it following World War II. Empires end. Currencies rise and fall with them.
But here's the crucial distinction. Declining reserve share is not the same as losing reserve currency status. Going from 70% to 50-something percent still leaves the dollar as, by an enormous margin, the single dominant reserve currency on Earth, more than double the euro, its nearest competitor. A slow decline over 20 years, driven mostly by modest diversification, looks nothing like the kind of rapid currency displacement that would signal genuine systemic change.
And the BRICS currency idea, while politically compelling as a symbol of resistance to American financial power, faces the exact same structural problems that have always prevented alternatives from emerging. You cannot easily build a shared reserve currency between countries with wildly different inflation rates, different capital control regimes, different legal systems, and, in some cases, active geopolitical tensions with each other. India and China, both BRICS members, have unresolved border disputes and deep strategic mistrust. Building a shared currency requires a level of economic and political integration that took Europe decades to achieve even among closely aligned democracies. And even then, it produced a currency with real structural weaknesses, as we discussed.
What would actually have to change? So, let's end with the honest question. What would it actually take for the dollar to lose its dominant position? It wouldn't be a single dramatic event. It would require a slow compounding accumulation of changes sustained over decades. It would require another economy, most plausibly China's, to open its capital account fully, allow its currency to float freely according to market forces, and build deep, liquid, transparent capital markets that international investors trust as much as US Treasuries. It would require a legal system credible enough that foreign governments and corporations feel as protected holding assets there as they do holding American assets. It would also likely require some kind of crisis of confidence in the United States itself. A genuine loss of faith in America's ability to manage its own fiscal situation, honor its debts, or maintain the political stability that underpins trust in its currency. Persistent, unaddressed federal deficits, genuine doubt about debt repayment, serious political dysfunction that calls the reliability of American institutions into question.
These are the kinds of forces that could, over time, erode the dollar's position in ways that trade agreements and BRICS summits alone cannot. None of this is impossible. Reserve currencies have changed before, and they will change again someday. Nothing in economic history is permanent.
But, when you look at the actual mechanics we've walked through today, the network effects locking the world into dollar habits, the depth and openness of American capital markets that no rival currently matches, the absence of a fully convertible yuan or a unified euro capable of stepping into the role and the sheer scale of existing dollar denominated debt and infrastructure built up over 80 years, you start to understand why so many confident predictions of dollar collapse have failed to materialize year after year for decades.
The dollar doesn't dominate the global economy because people love America or because the American economic model is beyond criticism or because Washington has earned some permanent right to financial supremacy. It dominates because building an alternative requires an almost impossible combination of economic scale, deep and open capital markets, full currency convertibility, political stability, and above all, decades of accumulated trust that simply cannot be manufactured through political will or economic ambition alone. Until another power can offer all of that simultaneously, the world will keep doing what it's always done, pricing its oil in dollars, holding its reserves in dollars, and settling its trades in dollars, not out of loyalty, but because right now, there is genuinely nowhere else for that much money to safely go. That's the real story behind dollar dominance, not propaganda, not conspiracy, just the accumulated weight of infrastructure, trust, and habit, the hardest things in the world to replace. I'm Jon Sindre Utchin and I'll see you in the next one.