Is USD dominance still inevitable?
By the OFX team | 12 June 2025 | 6 minute read
Even the mighty can fall; well, at least wobble. It’s been an unfortunate 2025 for the US dollar, down 9.2% against the euro and 7.3% against sterling so far.
The US dollar’s recent decline
Changing growth expectations, shifting policy positions, and trade tensions have all weighed heavily on the US currency.
This recent decline and the economic chaos of President Trump’s tariffs has had far greater impact than perhaps people realise. Muttered whisperings about the weakening case for the US dollar to be the dominant global reserve currency have broken out into open conversations, for the first time.
Why the US dollar still dominates
Given that the United States has remained the world’s largest economy, most international transactions continue to be conducted with the US dollar, and it remains the de facto world currency as it has been since World War II.
The USD is the world’s most commonly held reserve currency, accounting for more than 57% of global foreign exchange reserves1, and is the linchpin in the trading of commodities like oil and gold. It also acts as a peg for 66 currencies, including the Hong Kong dollar, the Saudi Riyal and the United Arab Emirates dirham. The US dollar is part of 90% of foreign currency trades, and 60% of foreign currency debt issuance is in dollars. Roughly half of global trade invoices and international loans are in US dollars.
Famously, in the early 1960s, French Finance Minister (and later President) Valery Giscard d’Estaing said that the global reserve currency status of the US dollar gave the United States an “exorbitant privilege”.
A distant second place is the reserve-currency stakes is the euro, which makes up about 20% of international foreign exchange reserves. (After the euro entered circulation in the Eurozone in 2002, its use as a reserve currency peaked at around 25% of global reserves in 2006). After that comes a diversified group of major currencies, led by the Japanese yen (5.8%), the British pound (5%), the Canadian dollar (2.7%), the Australian dollar (2.3%), the Chinese yuan (2.2%) and the Swiss franc (0.2%).
The euro’s position as the main challenger
At present, the euro could be a credible consideration to support the US dollar in the reserve role. And the currency of the Eurozone 20 has a determined advocate in European Central Bank (ECB) President Christine Lagarde, who used a major speech at the Jacques Delors Centre in Berlin in May to say that current changes create the opening for a “global euro moment,” going on to state that a shifting geopolitical landscape could “open the door for the euro to play a greater international role.”
Many would say, ‘oh, she is only talking her organisation’s book, bigging-up its currency unit.’ But the ECB sees a gap that it believes the euro can fill.
Lagarde said, “over the past 80 years, the global economy thrived on a foundation of openness and multilateralism – underpinned by US leadership.” By championing a rules-based international system and anchoring the US dollar as the world’s reserve currency, the United States set the stage for trade to flourish and finance to expand.”
“This global order proved immensely beneficial to the European Union, whose founding liberal principles aligned seamlessly with it”, she said. “But today it is fracturing. Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays. Openness is giving way to protectionism. There is even uncertainty about the cornerstone of the system: the dominant role of the US dollar.”
“All else equal”, said Ms. Lagarde, “this fracturing can pose risks for Europe. Our economy is deeply integrated into the global trading system, with exports accounting for close to one-fifth of our value added and supporting 30 million jobs,” she said. “Any change in the international order that leads to lower world trade or fragmentation into economic blocs will be detrimental to our economy.”
“But – with the right policy responses – there could also be opportunities”, said Ms. Lagarde. “The changing landscape could open the door for the euro to play a greater international role.”
Any central bank head is ambitious for its currency, especially one as relatively youthful as the euro. Ms. Lagarde ticked-off its attributes.
Opportunities and challenges for the euro
“Today, the euro is the second global currency, accounting for around 20% of foreign exchange reserves, compared with 58% in the case of the US dollar. Increasing the international role of the euro can have positive implications for the euro area,” she said.
“It would allow EU governments and businesses to borrow at a lower cost, helping boost our internal demand at a time when external demand is becoming less certain. It would insulate us from exchange rate fluctuations, as more trade would be denominated in euro, protecting Europe from more volatile capital flows. It would protect Europe from sanctions or other coercive measures.”
And then, the kicker: “In short, it would allow Europe to better control its own destiny – giving us some of what Valéry Giscard d’Estaing called the ‘exorbitant privilege’ 60 years ago.”
However, Ms. Lagarde was open about the challenges that face the European contender. “The euro will not gain influence by default – it will have to earn it,” she said. “With the euro as the world’s second-largest currency, there is another international currency alongside the US dollar. But this has not yet convinced investors.”
Closing that gap was “far from guaranteed,” Lagarde noted in her speech, while suggesting that the European currency could “earn” greater global influence with the right policy mix.
“A currency’s exposure to trade is especially important, she said, as it provides the initial pathway to wider international use”. And in this regard, the euro has plenty going for it. The EU is already a major actor in global trade, with the largest network of trade agreements in the world. Ms Legarde said, “Europe is the number one trading partner for 72 countries, which together represent almost 40% of world GDP: this status is reflected in the share of the euro as an invoicing currency, which stands at around 40%, more than double its share as a reserve currency”.
“Once a currency captures a larger share of trade invoicing, its role in international banking and finance, and ultimately as a reserve asset, becomes self-reinforcing, said Ms Lagarde: higher demand for the currency enhances its role as a store of value and further encourages investors to hold it”. In particular, Europe should plan to make the euro “the currency of choice for businesses invoicing international trade,” Ms. Lagarde said – which may be easier said than done.
Ultimately, she said, it would be up to Europe to implement the policy mix that would build on its strong and credible geopolitical foundation and trade status, to give the euro its chance to shine.
There are many elements to that mix, she said: upholding a robust legal and institutional foundation; more extensive political union; the fostering of deeper and more liquid capital markets; more determined reform of Europe’s domestic economy, prioritising reducing regulation; and even greater military strength. Any enhanced role for the euro must coincide with an ability to back-up partnerships, Lagarde said: “This is because investors – and especially official investors – also seek geopolitical assurance in another form: they invest in the assets of regions that are reliable security partners and can honour alliances with hard power. So, a credible geopolitical foundation must also rest on robust military partnerships.”
Is a global movement coming?
That may be an idealistic wish-list, from the viewpoint atop the fiscal pyramid of a collective of nations enmeshed in a still-evolving supra-national entity; but one cannot accuse the ECB head of being ambivalent about the future of the currency of which her organisation is the steward. The unfolding and ongoing changes “create the opening for a global euro moment,” believes Ms. Lagarde. If she is right, the euro is poised for a long-term era of greater strength.