Dollar hegemony is inevitable – even defaulting on debt cannot disrupt it.

The global economy is being battered these days by the fallout from war, disease and great-power competition. This is bad news for global trade, and some even wonder if it will also dramatically shake up a pillar of the global financial system: the U.S. dollar’s status as the world’s “reserve currency,” meaning its position as the currency most widely held by foreign governments and used in international financial and trade transactions.

Early in Russia’s war against Ukraine, some believed the comprehensive nature of the economic sanctions that were quickly slapped on Russia held the potential to accelerate the dollar’s decline. Because the sanctions are primarily and nearly exclusively being imposed by Western economies, the fear is that they could cause the global economy to bifurcate. Indeed, cut off from the Western financial and economic system, Russia has sought alternative economic outlets, primarily China, with China’s currency—the yuan—having supplanted the dollar as the most widely traded currency on the Moscow currency exchange. Similarly, by observing the West’s ability to essentially weaponize Russia’s dependence on their economies, countries like China could seek to decouple from those economies, while also seeking to establish alternatives to the dollar as the dominant global reserve and trade currency.

But such efforts do not portend a twilight for the dollar’s global dominance as a medium of exchange. Far from an impending fracturing of the global financial system into a dollar system and a nondollar-based system, we are likely to see so-called dollar hegemony continue for some time into the future.

First, the well-known tendency of a “flight to quality” among investors means that bad news for the global trade system is historically good news for the U.S. dollar. U.S. government-issued debt, in the form of 90-day Treasury Bills, is one of the most widely traded financial assets in the world. The market for them is highly liquid, making it a safe and steady way for investors to store money and gain steady returns when other financial assets are plummeting in value. This makes Treasury Bills a “safe haven” for money during times of trouble. For instance, when the extent of the COVID-19 pandemic became evident in the spring of 2020 and the global economy ground to a halt, investors turned to Treasuries. Buying those treasuries requires dollars, which means that increased demand for them also boosts demand for the dollar.

Could an alternative “safe haven” emerge? Perhaps, but it’s not likely in the near term. The debt market of the world’s other large economy, China, is not as open to foreign investors as that of the United States. There are also concerns that the rapid growth witnessed by the Chinese economy over the past few decades could falter or even collapse. Beyond that, there is a general perception that the Chinese government lacks credibility when it comes to the financial and economic data on which investors depend to make their decisions. And finally, recent moves by Chinese President Xi Jinping to consolidate power in his own hands while reasserting the Chinese Communist Party’s control over all aspects of Chinese society—including the economy—spooked investors, who fear owning assets in an economy where the rule of law and investor rights could be subject to the whims of a single individual.

There is the old standby, gold, which governments are indeed turning to as a safe haven. But gold is problematic as a long-term solution because its supply is limited. If one desires to see the global economy continue to grow, relying on a finite financial asset won’t cut it. This is also the obstacle to crypto currencies becoming an alternative safe haven. In addition to their volatility, which is more a feature than a bug, they are designed to be finite in availability.

Could an alternative to the U.S. dollar as a “safe haven” emerge? Perhaps, but it’s not likely in the near term.

Second and related, there is inertia baked into the dollar-based system. We see this in the global payments clearing system, known as SWIFT. Dollar transactions dominate the SWIFT system, and it is simply easier for financial actors to keep it that way. As Carla Norrlof wrote back when the United States and its European partners first restricted Russia’s access to SWIFT, the move was unlikely to induce a shift by other states—or even Russia itself in the long term—toward alternative systems, because “the existing ones all have problems” or cannot scale to the level required for facilitating most global financial transactions.

We can also see this inertia in the global oil market. A key reason the dollar is valuable globally is because key oil producers—though no longer Russia—price oil using dollars. As Henry Liu wrote in a seminal 2002 article in the now-defunct Asian Times, “This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil.”

The dollar’s dominant status in this market seemed threatened when Saudi Arabia, the largest oil producer in the Organization of Petroleum Exporting Countries, announced in March that it was looking into alternatives for pricing its oil. If that were to happen, then a key pillar of dollar dominance would indeed be toppled. But those rumblings did not translate into substantial action, likely because Saudi Arabia is still highly dependent on the U.S. for military support in the region.

Third and perhaps paradoxically, the dollar’s potential weaknesses only highlight its strengths. If the dollar were to lose its status as a reserve currency, it will in all likelihood be due to something Washington does to undermine the currency’s credibility. One such scenario would be a Republican-controlled House or Senate inducing a U.S. government default by refusing to raise the debt ceiling, the cap on the amount that the U.S. government is allowed to borrow. Presently, the U.S. government pays both the interest and principal on its existing debt largely by issuing new debt, analogous to using one credit card to pay off another.

If the debt ceiling is reached and not raised, which could happen by mid-to-late 2023, the U.S. government would effectively be forced to stop financing its debt, signaling a default. This could rattle markets, which commonly view U.S. Treasuries, as mentioned above, as a safe asset. If Treasuries are no longer “safe,” then neither is the dollar. But recall that there are simply no viable alternatives to the dollar in the international system. So even if the U.S. government defaults, the dollar’s status may not be affected, at least in the immediate term.

In sum, the dollar will remain the world’s dominant reserve currency. Perhaps more than military might, cultural prestige or influence in global economic institutions, the dollar’s status symbolizes and actualizes the United States’ global dominance. Globalization’s golden age might be ending, but the dollar’s golden status isn’t.