De-dollarization: Why Countries Want Off the Dollar and Why They Mostly Can't

De-dollarization is a meaningful, sustained decline in the use of the U.S. dollar in global trade and financial transactions — a structural shift in demand for the currency as a reserve asset, distinct from the short-term ups and downs of the greenback driven by interest rates and risk sentiment. Analysts at J.P. Morgan frame the central question bluntly: the dollar's dominance is now in question due to recent geopolitical shifts, and the trend is increasingly salient for investors and corporates. The evidence to date, however, points to gradual diversification rather than an imminent collapse of dollar dominance, because the forces pushing countries away from the dollar are matched by powerful structural forces keeping it entrenched.

Understanding De-dollarization: Drivers and Constraints

The trend is best understood as a contest between two opposing sets of forces. On one side sit political and economic motivations: the use of dollar-based sanctions and asset freezes, and the global spillovers of U.S. monetary policy. On the other side sit structural constraints: institutional path dependence, the circular logic of dollar debt markets, and the sheer depth of dollar liquidity. The table below organizes the factors identified in expert analysis from J.P. Morgan and the American Institute for Economic Research into these two camps, showing the mechanism through which each operates.

De-dollarization: Drivers vs. Constraints

The model clarifies why the trend is contested: every driver has a countervailing constraint, and the constraints operate through habit and market structure rather than through any policy decision that could be reversed quickly.

Geopolitical Motivations for Diversification

The most concrete driver is defensive. Writing for the American Institute for Economic Research, Jason Kelly notes that the seizure of reserves from Afghanistan in 2021 and Russia in 2022 proved that even central-bank assets held in Western jurisdictions can be frozen. Central banks and sovereign funds have responded by reallocating portions of their reserves away from U.S. Treasurys toward gold, euros, yuan and other assets. Kelly characterizes this trend as modest in percentage terms but representing a major shift in attitude — the logic is no longer optimization but self-protection.

There is also a plumbing dimension. Over time, Kelly argues, a patchwork of alternative arrangements could amount to de facto diversification of financial infrastructure, limiting the United States' ability to monitor or block transactions unilaterally. That political objective — reducing exposure to U.S. leverage — is distinct from any economic claim that alternatives are superior assets.

Economic Pressures and U.S. Policy Spillovers

The second driver is economic rather than geopolitical, and it stems from the dollar system's own success. U.S. macroeconomic policy, as noted by Kelly, generates global spillovers of significant magnitude. When the Federal Reserve tightens its policy to combat domestic inflation, emerging-market currencies weaken, debt-service costs rise, and capital inflows reverse. Conversely, loose U.S. monetary policy can indirectly fuel asset bubbles abroad. Many policymakers outside the United States see this as a vulnerability and a motivation to diversify.

This creates a structural grievance that predates any single sanctions episode. Countries that borrow, trade or hold reserves in dollars inherit exposure to a central bank that sets policy for domestic U.S. conditions. Diversification, in this framing, is a hedge against monetary policy made elsewhere — a motivation that would persist even if geopolitical tensions eased.

The Enduring Strength of Dollar Dominance

Against these pressures stand constraints rooted in market structure. The circularity of dollar debt markets is self-reinforcing: multinationals issue debt in dollars because investors prefer dollar assets, and investors prefer them because global corporations issue in dollars. Breaking that loop, Kelly writes, requires not only new instruments but also credible enforcement, regulation, and deep financial markets — attributes few alternatives possess.

Habit magnifies technical efficiency into structural dominance. Central banks train staff and build risk systems around dollar instruments; corporate treasurers hedge in dollar markets; commodity exporters quote in dollars; data providers benchmark in dollars. J.P. Morgan's analysts add that any candidate reserve currency must be perceived as safe and stable and must provide liquidity sufficient to meet growing global demand — a bar that currently limits credible challengers. Their assessment is that the evidence for a structural shift away from the dollar across markets remains limited.

Potential Economic Consequences for the U.S.

If a significant shift did occur, J.P. Morgan's analysis suggests the impact would be most acutely felt in the United States, where American financial assets would likely underperform versus the rest of the world. Alexander Wise, who covers long-term strategy at the bank, is specific about the channels: for U.S. equities, outright and relative returns would be negatively affected by divestment or reallocation away from U.S. markets and a severe loss of confidence.

Fixed income would face its own pressure. Wise notes there would likely be upward pressure on real yields due to the partial divestment of U.S. fixed income by investors, or the diversification or reduction of international reserve allocations. In plain terms, if central banks buy fewer Treasurys, the U.S. government and private borrowers would face higher real borrowing costs — a fiscal consequence that links reserve composition directly to domestic economic outcomes.

Global Financial System Implications

Beyond U.S. borders, de-dollarization could shift the balance of power among countries, in turn reshaping the global economy and markets, according to J.P. Morgan's analysis. A credible alternative would require positive developments outside the U.S. — economic and political reform in China, for example — to boost the credibility of competing currencies. The discussion here concerns alternatives' role as competitors to the dollar rather than a detailed assessment of any single currency.

The transition itself carries risks. A move away from a single dominant reserve asset toward a more fragmented system would affect international trade and investment flows, and the reallocation of reserves across a patchwork of assets and payment arrangements implies a period of adjustment in how cross-border transactions are financed and settled. Whether fragmentation produces instability or a stable multipolar equilibrium is not settled by the available analysis.

Navigating the Evolving Global Currency Landscape

Neither the drivers nor the constraints are likely to disappear: geopolitical risk and U.S. policy spillovers will keep motivating diversification, while institutional inertia and dollar liquidity will keep slowing it. Policymakers and financial institutions should monitor the interplay between geopolitical pressures and economic fundamentals that influence currency diversification strategies. The measurable indicator to watch is changes in central bank reserve composition and the adoption of alternative payment systems for cross-border transactions — the concrete signals, identified in the analyses above, that would show whether the gradual diversification documented so far is accelerating into something more structural.

Sources

• De-dollarization: The End of Dollar Dominance? — Jpmorgan
• Dedollarization: Causes, Constraints, and Consequences — AIER