The unparalleled reign of the US dollar as the world's primary reserve currency, a status held since the end of the Second World War, is facing its most significant test in decades. According to eminent economist Carmen M. Reinhart, a combination of soaring US fiscal deficits, inflationary pressures, and growing uncertainties in global trade relations is prompting countries worldwide to actively reduce their reliance on the greenback.
The Erosion of an "Exorbitant Privilege"
The dollar's reserve status has long granted the United States a significant financial advantage, famously termed an "exorbitant privilege" by former French Finance Minister Valéry Giscard d'Estaing in the 1960s. This privilege allowed the US government to borrow at exceptionally low interest rates, as global central banks and private investors consistently treated US Treasury securities as the ultimate safe-haven asset.
However, Reinhart argues that decades of this easy financing have bred complacency in Washington. Successive generations of US policymakers have largely ignored the mounting risks posed by persistent current-account and budget deficits. This trend was exacerbated after the 2008 financial crisis when the Federal Reserve maintained a "low for long" interest rate policy, which many mistakenly believed would last indefinitely.
The Turning Tide: Foreign Appetite Wanes
The data reveals a clear shift. Foreign ownership of US Treasury debt peaked at around 37% of the total stock in early 2013, largely driven by China's massive accumulation of foreign exchange reserves during its high-growth phase. Since that peak, the share has been in steady decline, falling to approximately 22% by the end of 2024.
This decline is not merely a currency valuation effect but reflects a deeper trend: the explosive growth of US fiscal deficits and new debt issuance has simply outpaced foreign demand. The turning point came as pandemic-era inflation surged to 40-year highs, forcing the Fed and other central banks to abruptly end the low-rate era. Consequently, US federal net interest payments have skyrocketed, more than doubling from 2021 levels to reach 3.1% of GDP in 2024.
Trade Fragmentation Accelerates the Shift
Recent geopolitical developments have added fuel to the fire. The announcement of punitive tariffs by US President Donald Trump on April 2, 2025—dubbed "Liberation Day"—and the ensuing policy volatility have further strained global economic ties. Faced with this uncertainty, many nations are now hedging their bets and redoubling efforts to diversify their reserves away from the dollar.
Private investors are following suit. While still attracted to vibrant US equity and tech markets, they are increasingly using costly currency hedges to protect their dollar exposures—a clear signal of growing concern about the currency's long-term stability.
No Heir Apparent, But the Road is Running Out
Reinhart notes that there is no single, ready alternative to the dollar's deep and liquid Treasury market. The euro lacks a unified debt market to back its single currency, and China's renminbi, despite the country's economic heft, remains constrained by capital controls and a lack of full convertibility.
Nevertheless, the absence of a clear successor does not guarantee the dollar's perpetual dominance. The Trump administration's bet that economic growth alone will solve the nation's debt problem is viewed as highly dubious, especially as the safe-haven status of Treasuries erodes. The strategy of "kicking the can down the road" on fiscal responsibility, Reinhart concludes, will eventually run out of road. The world's slow but steady diversification away from dollar assets is a warning that America's exorbitant privilege can no longer be taken for granted.
