Executive Summary
This essay examines the evolving dynamics of U.S. dollar dominance in the global monetary system against the backdrop of institutional erosion and the rise of alternative digital payment rails. The core analytical tension resides between the dollar's enduring structural role—rooted in deep liquidity and established financial infrastructure—and growing political and institutional stresses that undermine long-term confidence. Crucially, innovations such as multi-central bank digital currency (mCBDC) infrastructures, exemplified by the mBridge network, are introducing viable pathways for states to settle trade outside dollar-centric frameworks. For policymakers in the G7, the emerging evidence suggests an accelerating "slow bleed" of dollar hegemony: not through abrupt collapse, but via steady decoupling in official sectors and geopolitical hedging. As of January 2026, these dynamics have intensified, with recent data revealing both the persistence of dollar dominance in certain dimensions and accelerating fragmentation in others.
I. The Shifting Terrain: Geopolitics and Institutional Trust
1. Weaponization and "Pox Americana" in the Financial System
Since the end of the Bretton Woods era, the dollar's primacy has rested not on formal convertibility to gold but on network effects, liquidity depth, and perceptions of U.S. commitment to stable financial governance. Over the past decade, however, the use of the global financial system as a geopolitical instrument—especially sanctions, asset freezes, and financial exclusion—has eroded the perception of the dollar as a neutral medium of exchange. This dynamic has been described in strategic commentary as a shift from a system of Pax Americana to what some analysts call "Pox Americana," whereby the very mechanisms that undergird dollar dominance are wielded as tools of coercive statecraft.
U.S. sanctions on Russia, Iran, and other states have highlighted the reliance of global trade on Washington's control over correspondent banking, cross-border messaging (e.g., SWIFT interfaces), and access to dollar liquidity. For European policymakers in particular, what was once irritation over unilateral actions has matured into active strategic hedging, including efforts to develop alternative settlement channels and to reinvigorate European monetary integration—a trend noted by prominent economists as a response to perceived unpredictability in U.S. policy directions.
The implication is stark: when the issuer of the world's reserve currency is seen as an unpredictable guardian of the international monetary system, risk premiums rise on dollar-denominated exposure. Private and sovereign investors increasingly diversify into hard assets—precious metals, commodities, and real estate—citing political expropriation risk and currency debasement concerns alongside macroeconomic uncertainty.
2. Assault on Central Bank Independence and Federal Reserve Credibility
Concurrent with geopolitical pressures, institutional pressures on key U.S. governance structures have intensified. Throughout 2025 and into early 2026, the Federal Reserve has faced unprecedented political scrutiny. In January 2026, the Trump Justice Department subpoenaed the Federal Reserve for information related to its headquarters renovation, prompting bipartisan Congressional concern about threats to central bank independence. President Trump has publicly stated his desire to fire Federal Reserve Chair Jerome Powell, whose term as chair expires in May 2026, and has called for more aggressive interest rate cuts despite the Fed's data-dependent approach.
Such pressures challenge the norm of central bank independence that underpinned the dollar's credibility since the Volcker era. Economists warn that erosion of this independence risks a reversion to the macroeconomic conditions of the 1970s—characterized by political interference in interest rate setting and fiscal dominance over monetary constraints. As noted in a Council on Foreign Relations analysis, public pressure from the president on the Fed undermines its independence and could erode confidence in the dollar as the world's reserve currency, potentially leading investors to demand higher interest rates on U.S. sovereign debt.
In January 2026, U.S. inflation metrics remain persistently above long-run targets. The Congressional Budget Office projects inflation as measured by the PCE price index at 2.4% for 2026, above the Federal Reserve's 2% target, before declining to 2.0% in 2027. Meanwhile, federal debt continues on an upward trajectory, widening the "credibility gap" between policymakers' inflation commitments and market expectations. The CBO estimates that federal debt held by the public will reach 100% of GDP at the end of fiscal year 2025, rising to 107% by 2029 and continuing to 156% by 2055, with net interest payments reaching unprecedented levels.
Morgan Stanley and other analysts emphasize that U.S. policy choices—especially fiscal sustainability, trade practices, and institutional integrity—will be decisive in the extent of future de-dollarization. These pressures reduce the attractiveness of dollar-denominated assets despite relatively high yields, as investors weigh political risk alongside traditional macroeconomic variables.
II. Metrics of Dominance: The "Pipes" Versus the "Asset"
The global monetary order can be conceptualized as comprising two distinct but interlinked dimensions:
The "Pipes": payment systems, settlement rails, and transaction networks that facilitate day-to-day trade and financial flows; and
The "Asset": the dollar as a store of value, represented most visibly by U.S. Treasury securities functioning as the pre-eminent safe-haven asset.
Despite substantial political headwinds, the dollar's "pipes" continue to command dominant use in private sector trade invoicing and global payments. As of 2024, the dollar accounts for approximately 88% of global foreign exchange transactions according to the Federal Reserve's analysis, and around 54% of global trade is invoiced in dollars—far exceeding the U.S. share of global trade at approximately 10%. Corporations and financial institutions still prefer dollar liquidity for transactional convenience, risk management, and depth of market.
However, official sector behavior—particularly central bank reserve allocation and sovereign wealth investment—reveals erosion in confidence toward U.S. fiscal sustainability and institutional predictability. According to IMF COFER data, the dollar's share of global foreign exchange reserves declined to 56.92% in Q3 2025, down from approximately 58% in 2024 and representing a two-decade low. While this decline has been gradual rather than precipitous, it signals a steady diversification away from dollar assets among official institutions.
Critically, demand for U.S. Treasury debt among foreign official institutions has softened markedly in recent years, reflecting concerns about long-run solvency and geopolitical neutrality. This decoupling—heavy use of dollar "pipes" with diminishing trust in the dollar "asset"—signals a bifurcation in the dollar's functional roles, with potentially significant long-term implications for U.S. borrowing costs and fiscal sustainability.
III. Emerging Challengers: The Rise of mBridge and Digital Settlement Rails
Among the most consequential developments in international finance during the early 2020s has been the maturation of digital currency infrastructures that facilitate cross-border settlement independent of U.S. clearing channels.
1. The mBridge Bypass: A New Payment Rail
Project mBridge—a multi-central bank digital currency (CBDC) initiative originally developed with the Bank for International Settlements (BIS) Innovation Hub alongside central banks from mainland China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia—has achieved significant scale. As of November 2025, mBridge has processed more than 4,000 cross-border transactions with a cumulative value exceeding $55 billion, representing a roughly 2,500-fold growth from its pilot phase in 2022.
The platform uses distributed ledger technology to enable real-time, peer-to-peer settlement of multiple CBDCs without traditional correspondent banking intermediaries. The digital yuan (e-CNY) accounts for an estimated 95% of total settlement volume on mBridge, effectively creating a digital yuan-centric corridor for trade and wholesale transactions among participating economies. This development is particularly significant given China's broader push to internationalize its currency: domestically, China's e-CNY processed more than 3.4 billion transactions worth approximately 16.7 trillion yuan ($2.4 trillion) through late 2025.
The rapid expansion of mBridge reflects both technological progression and strategic intent. The platform's architecture—compatible with programmable transaction protocols and capable of reducing settlement frictions—offers a tangible alternative to dollar-dominated networks such as SWIFT. In November 2025, the UAE Ministry of Finance and the Dubai Department of Finance executed the first government agency transaction on mBridge using the digital dirham, demonstrating the platform's viability for public sector payments beyond commercial banking.
While developers and analysts argue that mBridge does not seek to supplant the dollar per se, its growth demonstrates the feasibility of parallel settlement rails that diminish reliance on U.S. clearing systems. As the Atlantic Council's analysis notes, China is not seeking to displace the dollar outright, but rather building parallel settlement rails that reduce reliance on dollar-based systems—a strategy of gradual yuan internationalization through digital infrastructure.
Notably, in October 2024 the BIS formally exited direct development involvement in mBridge, with BIS General Manager Agustín Carstens describing the move as the conclusion of a four-year engagement. The withdrawal occurred one week after the BRICS-Plus summit in Kazan, where Russian President Vladimir Putin proposed a "BRICS Bridge" as an alternative international payment system. Carstens clarified that mBridge systems cannot be used by countries subject to international sanctions, though the timing raised questions about geopolitical pressures influencing the decision.
2. The Western Response: Project Agorá and Tokenization Initiatives
In response to developments like mBridge, Western central banks have initiated their own digital infrastructure experiments. Among these is Project Agorá, a consortium effort involving seven central banks representing major reserve currencies: the Federal Reserve Bank of New York, the Bank of England, the Bank of France (representing the Eurosystem), the Bank of Japan, the Bank of Korea, the Bank of Mexico, and the Swiss National Bank. Project Agorá aims to explore tokenization of wholesale central bank money and commercial bank deposits on programmable platforms to enhance cross-border payment efficiency.
As of January 2026, Project Agorá has advanced to its user testing phase, marking what BIS Deputy General Manager Andréa Maechler described as a major milestone for the initiative. More than 40 leading financial institutions, including HSBC, JP Morgan, Citi, Deutsche Bank, Standard Chartered, and infrastructure providers like SWIFT, Visa, and Mastercard, are participating in the project. The combined design and prototype building phase is expected to conclude in the first half of 2026, when a report on lessons learned will be published.
Project Agorá's distinctive approach involves creating a unified ledger that merges tokenized commercial bank deposits with wholesale central bank money on a programmable platform featuring smart contracts. This architecture seeks to enable atomic transactions—payments completed synchronously and in full—while preserving the critical two-tier relationship between depositors and banks. Unlike mBridge's focus on direct CBDC exchange, Agorá emphasizes maintaining existing banking relationships while enhancing speed and programmability.
While details of Project Agorá remain under development, its formation underscores recognition among G7 policymakers that digital payment technologies constitute strategic infrastructure, not merely technical novelties. The project also aims to address critical regulatory and legal considerations, examining how tokenized money can comply with existing rules on settlement finality, anti-money laundering, and countering the financing of terrorism.
IV. Critical Assessment: Strategic Risks and Policy Imperatives
The evolving monetary landscape presents multiple, interconnected strategic risks for the G7 and global governance more broadly:
1. The "Slow Bleed" of Dollar Dominance
There is broad consensus among analysts that there is no imminent "dollar killer" on the horizon; however, the combined effects of high fiscal deficits, institutional politicization, and emergent digital settlement infrastructures are contributing to a cumulative weakening of dollar hegemony. The fiscal trajectory is particularly concerning: the CBO projects that federal debt held by the public will rise from 100% of GDP at the end of fiscal year 2025 to 156% of GDP by 2055. Any budget deficit exceeding approximately 4.5% of GDP will cause the debt-to-GDP ratio to rise given projected nominal GDP growth rates.
The Congressional Budget Office projects the fiscal year 2025 deficit at $1.9 trillion (6.2% of GDP), with the deficit rising to $2.5 trillion (6.1% of GDP) in 2035 and $6.5 trillion (7.3% of GDP) by 2055. Net interest payments are projected to rise from 3.2% of GDP in 2025 to 5.4% by 2055, far exceeding the previous historical peak of 3.2% in 1991. In fiscal year 2025, net interest outlays are estimated at approximately $952 billion, exceeding spending on national defense, and are projected to continue rising dramatically in coming decades, ultimately consuming 28% of federal revenues by 2055.
Structural de-dollarization is heavily influenced by U.S. policy decisions regarding debt sustainability, geopolitical engagement, and institutional credibility. This "slow bleed" scenario is characterized by continued private sector reliance on dollar plumbing for liquidity, juxtaposed with declining official sector appetite for U.S. assets and gradual diversification of reserve portfolios into alternatives—both real assets and non-dollar financial instruments.
2. Geopolitical Fragmentation and Sanctions Resistance
The 2024-2025 period witnessed intensified efforts by BRICS nations and other economies to reduce dollar dependence. China's Cross-Border Interbank Payment System (CIPS) expanded to connect thousands of banks across more than 100 countries as of 2025. While CIPS remains substantially smaller than SWIFT, its rapid expansion reflects growing confidence in yuan-based financial networks.
Trade in local currencies has accelerated: trade among Shanghai Cooperation Organisation (SCO) nations—including India, Russia, China, Iran, Pakistan, and several Central Asian states—increasingly occurs in local currencies rather than dollars or euros. India has established Local Currency Settlement Agreements with multiple countries, while major commodity exporters increasingly price energy in non-dollar currencies to circumvent sanctions and reduce exchange rate volatility.
President Trump's explicit threats of 100% tariffs on BRICS exports if member nations attempt to bypass the dollar have paradoxically reinforced the strategic imperative for such countries to develop alternative payment systems as a matter of economic sovereignty and sanctions resistance.
3. Technological Innovation and Monetary Frameworks
The intersection of digital currency innovation with domestic political dynamics presents another strategic frontier. Should stablecoins or tokenized deposit systems be deployed in ways that bypass traditional banking regulations, such shifts could paradoxically undermine legal frameworks that support monetary stability and contract enforceability. The International Monetary Fund has noted that privately issued stablecoins, particularly in jurisdictions with weak fiscal and monetary institutions, could exert competitive pressures on established monetary frameworks.
Project Agorá represents an attempt by central banks to maintain control over the evolution of programmable money, offering a credible, regulated alternative to private stablecoins for cross-border and institutional payments. However, the success of this approach remains uncertain, and regulatory fragmentation across jurisdictions could limit scalability.
4. The Euro's Second Chance: Integration and Safe-Haven Status
A frequently cited alternative to dollar hegemony is an integrated European monetary safe haven. Economists such as Olivier Blanchard and Ángel Ubide have proposed that the current geopolitical environment presents an opportune moment for Europe to create a deep and liquid Eurobond market. They argue that given increasing questions about the soundness and stability of dollar assets, creating such a market would provide investors with the alternative safe asset they seek.
As of January 2026, the European Commission plans to issue €90 billion in EU-Bonds during the first half of 2026 under its Unified Funding Approach. The NextGenerationEU program has established the EU as a significant bond issuer, though the total stock of various Eurobond instruments remains at approximately €700 billion—substantially smaller than the $30 trillion U.S. Treasury market.
ECB President Christine Lagarde and other European policymakers have emphasized the strategic importance of expanding euro-denominated safe assets. In June 2025, ECB Chief Economist Philip Lane outlined several complementary routes to expand the stock of common euro debt, including proposals for senior bond structures and approaches that could provide enhanced liquidity without requiring full debt mutualization.
Critically, Germany's announcement of increased fiscal spending on infrastructure and defense in 2025 was interpreted by markets as a macroeconomic positive for future euro area growth prospects, suggesting improved market confidence in European fiscal coordination. If Europe succeeds in deeper financial integration, especially via credible mutualized debt instruments with robust fiscal governance, it could offer a liquid "safe haven" asset alternative to U.S. Treasury securities, particularly during periods of global stress.
However, significant obstacles remain. France's credit rating faced downward pressure during 2025 due to fiscal challenges and political uncertainty. Political fragmentation and divergent fiscal positions among member states continue to complicate efforts at deeper integration.
V. Conclusion
The evidence as of January 2026 points to a nuanced but clear trajectory: the U.S. dollar's global primacy is not collapsing suddenly, but its structural advantages are under sustained pressure from both geopolitical behavior and technological innovation. Digital settlement rails such as mBridge illustrate that alternative infrastructures can scale rapidly, offering states and commercial actors viable pathways to conduct cross-border transactions without default reliance on dollar-based systems. By November 2025, mBridge had processed over $55 billion in transactions, demonstrating proof of concept for wholesale CBDC settlement at meaningful scale.
Structural persistence—rooted in liquidity depth, network effects, and the absence of a singular alternative—remains significant. The dollar continues to dominate in foreign exchange transactions (88%), trade invoicing (54%), and international finance. Yet institutional erosion, exemplified by political pressures on Federal Reserve independence and unsustainable fiscal trajectories, combined with the diffusion of digital rails, invite a strategic recalibration among G7 policymakers.
The critical variable is not whether technology enables alternatives to dollar-based settlement—mBridge and CIPS demonstrate that it does—but rather whether political and institutional conditions in the United States accelerate or decelerate the "slow bleed" of dollar hegemony. Fiscal year 2025 deficits approaching 6.2% of GDP, net interest payments projected to reach $952 billion annually, and debt projected to reach 156% of GDP by 2055 all suggest that the fiscal foundation of dollar primacy is eroding.
For G7 policymakers, the imperative is threefold: first, to maintain institutional credibility and central bank independence as bulwarks of monetary stability; second, to accelerate development of Western digital payment infrastructure through initiatives like Project Agorá to ensure competitive parity with emerging alternatives; and third, to pursue fiscal consolidation strategies that restore confidence in long-term debt sustainability. European policymakers face a parallel opportunity to deepen monetary integration and expand safe asset supply through credible Eurobond mechanisms.
The dollar's role as the global reserve currency evolved over decades and is unlikely to be displaced rapidly. However, the confluence of institutional pressures, fiscal imbalances, geopolitical fragmentation, and technological alternatives suggests that the coming years will be decisive in determining whether dollar hegemony persists largely intact, undergoes managed transition toward a multipolar monetary system, or experiences more disruptive adjustment. As global investors increasingly question the stability of dollar assets—evidenced by declining foreign ownership of Treasuries, rising alternative reserve holdings, and expanding alternative payment networks—the window for proactive policy responses is narrowing. Policymakers who balance domestic legitimacy, fiscal stewardship, and global monetary stability will shape not only their nations' economic futures but the architecture of the international financial system itself.
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