U.S. dollar hegemony is preserved but fraught with increasing geopolitical tensions. Only a unipolar system sustains the dollar’s influence.

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.

Yet pessimism about the dollar’s future abounds. Rana Foroohar of the Financial Times has warned of a “post-dollar world”; her colleague Martin Wolf worries that dollar dominance will give way to a bipolar international monetary system, with the United States at one end and China at the other. Gita Gopinath, the deputy managing director of the International Monetary Fund (IMF), sees sanctions ushering in a fragmented, multipolar currency order. Big banks are also skeptical about the prospects of continued dollar dominance. Zoltan Pozsar of Credit Suisse believes a multipolar, commodity-based currency order lies ahead. A year ago, Goldman Sachs’s Cristina Tessari and Zach Pandl cautioned the dollar might follow the fate of the British pound and become a second-tier currency.

If predictions about a coming multipolar currency order are correct, the United States will undergo a meaningful decline in its power base and in its ability to project power, with broader implications for international stability and order. By rethinking how it imposes sanctions, however, the West can help protect the dollar’s standing. The United States and its allies can design sanctions in a way that will prevent the unipolar currency order from further eroding. Namely, they must build broad sanctions coalitions in which participation is strictly voluntary and those who do not join are not forced to choose sides. Countries imposing sanctions should recognize the consequences these punishing measures have on third parties and, whenever possible, take steps to alleviate those unintended effects. Sanctions should be reserved for the clear-cut cases in which the international order is under threat, as in Ukraine, and should not be used for parochial purposes, as when sanctions were reinstated against Iran in 2018, even though it hadn’t broken the terms of the nuclear deal, and when the Trump administration imposed overly harsh sanctions on Cuba. Imposing sanctions to pursue narrow U.S. interests raises legitimate fears among countries that they could be targeted next and therefore motivates them to find alternatives to the dollar. But if the United States and its allies resort to sanctions to preserve the central elements of the liberal international order, the dollar should keep its place as the currency of choice.