The dollar remains dominant over great power world affairs.

The centrality of the U.S. dollar in world affairs is mainly determined by economic factors, but geopolitical forces are threatening to weaken its top spot in the currency hierarchy. U.S. sanctions in response to Russia’s invasion of Ukraine have pushed some countries to further reduce their reliance on the dollar. The geopolitical tug of war between allies and foes, liberal and illiberal states carries high stakes. “Great powers have great currencies,” quipped the Nobel laureate Robert Mundell. If the currency system were to become multipolar, U.S. monetary perks would recede, as would the United States’ global economic influence and its ability to use dollars as an alternative to military force when policing international order.

A more fragmented global economy in which security partnerships determine economic relations is coming into view. But an end to the dollar’s dominance is still unlikely. Countries participating in the sanctions against Russia or benefiting from U.S. currency coercion aimed at upholding the liberal international order’s core principle of nonaggression have no incentives to diversify away from the dollar. Even countries opposing Western sanctions are likely to stick with the dollar to preserve their own security and U.S. security guarantees in a hardening geopolitical climate.

In today’s fraught international environment, countries are returning to Cold War logic, questioning the sustainability of systemwide economic interdependence over privileged economic ties with friends. With the United States at the center of the largest security network in the world, the dollar stands to benefit from this shift, even though it will simultaneously be counterbalanced by the currencies of geopolitical rivals. This bifurcated dynamic, in which U.S. supporters shore up dollar dominance and Washington’s detractors reduce their dollar dependence, nonetheless represents the most important threat to the dollar’s global prominence since the arrival of the euro in 1999.

The dollar is the preferred currency of governments, accounting for approximately 60 percent of central bank reserves in late 2022, compared with the euro’s 20 percent, and the yen’s six percent. Individually, the pound, the Chinese yuan, and the Canadian and Australian dollar represent less than five percent of government reserves. The dollar is also dominant, although less so, in private markets.