Dr. Jeffrey Roach | Chief Economist
Hypothetical Scenario
Let’s develop a scenario to explain the importance of foreign exchange (FX) markets and specifically, the dominance of the U.S. dollar. Say, for example, Thailand, one of the world’s major rice exporters, engages in trade with Brazil, the second‑largest cotton exporter. When these two countries conduct bilateral trade, they typically do not settle transactions directly in Thai baht or Brazilian real. Instead, they frequently convert their home currencies into U.S. dollars, the dominant invoicing and settlement currency in global trade and FX markets. Because the U.S. dollar is one of the most liquid and widely accepted intermediaries for cross‑border payments, it is the de facto choice for this hypothetical Thai-Brazilian trade settlement.
Dominance of the Dollar
The previous scenario explains why the dollar has maintained such dominance in global trade. One of the most convincing stats for the dollar’s reserve currency status is the fact that the U.S. dollar is in roughly 90% of all global FX transactions. And that hasn’t materially changed for over two decades. But in contrast, in recent years, the euro was in roughly 30% of FX transactions, down from roughly 40% in 2010[1].
Network effects help explain why the U.S. dollar maintains its dominant role as the world’s primary reserve currency. Because so many countries, financial institutions, and global markets already use the dollar for trade, investment, and reserve holdings, its value and convenience increase as more participants rely on it. This broad adoption creates a self‑reinforcing cycle: central banks continue to hold dollars because many global transactions are dollar‑denominated, and global transactions remain dollar‑denominated because central banks continue to hold dollars. Because so many are already using the dominant product, switching becomes difficult, and competitors struggle to gain traction.
In addition to the vast majority of all FX transactions, the dollar makes up a sizable share of foreign exchange reserves. The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) data underscore this dynamic, showing that the U.S. dollar represents the largest share of global foreign exchange reserves. For example, it accounted for roughly 57% of world reserves in the latter half of 2025.
U.S. Dollar Has the Largest Share of Global Foreign Exchange Reserves
Source: LPL Research, International Monetary Fund 02/25/26
But Not Without Competitors
Such persistent scale and liquidity make it difficult for alternative currencies to displace the dollar, illustrating how network effects entrench incumbency in the international monetary system.
The BRICS nations (Brazil, Russia, India, China, and South Africa, along with newly expanded members) have worked to create a network for cross‑border transactions in national currencies without relying on Western‑dominated systems like SWIFT or reserve currencies such as the U.S. dollar but have run into challenges getting other trading partners to align[2]. Nations unhappy with dollar dominance will continue to iterate on ways to displace the dollar so threats will continue. But as the Fed paper explains, the dollar is deeply embedded in global finance and will likely remain dominant “for the foreseeable future.”
Conclusion
Trading tensions could create fodder for countries to coalesce around non-dollar denominated trading. Political firestorms, such as a politicized Federal Reserve, also create stresses in cross-border payments. Over the longer term, several developments could gradually increase the appeal of alternative currencies. Geopolitical concerns have prompted discussion about diversification, but the dollar’s reserve share has not meaningfully declined, partly because most other major reserve currencies are issued by U.S. allies. Greater European fiscal integration and the expansion of jointly issued EU bonds could strengthen the euro’s role, though political fragmentation remains a limiting factor. China’s economic size continues to grow, yet the renminbi’s international prospects are constrained by capital controls, limited convertibility, and weak investor confidence. Technological shifts, including digital currencies and stablecoins, could either weaken or reinforce the dollar, especially since most stablecoins are already dollar‑linked. Overall, absent severe disruptions to dollar stability combined with major improvements in competing currencies, the dollar is likely to remain the world’s dominant reserve currency for the foreseeable future.
[1] See Fig. 11, The Fed – The International Role of the U.S. Dollar – 2025 Edition “Because one currency is purchased and another currency is sold in FX transactions, each trade is counted twice, so the sum of the FX transactions measure is 200 percent.”
[2] The BIS announced in October 2024 that it was handing the project over to the partners. Project mBridge reached minimum viable product stage
Important Disclosures
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