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The dollar will decline, not fall

The dollar will decline, not fall Expert comment jon.wallace 9 June 2026 The history of pound sterling, the world’s previous dominant currency, is not reassuring for the dollar. Over the past 18 months there has been considerable debate about the dollar’s ability to retain its pre-eminent role in the global economy. For some, a tipping point is approaching where the world dumps the dollar. For others, the currency’s inherent strengths will make it robust even to the latest vagaries of partisan politics. But these arguments lack something vital – history. The decline of pound sterling, the world’s first truly global currency, suggests that the dollar’s demise may well be inevitable – but also that it’s unlikely to be quick or straightforward. Declining heft means declining dominance… The way in which a currency becomes dominant can be usefully explained in both standard economic terms and through a geoeconomic lens. Economic theory links the rise of dominant currencies to self-reinforcing interactions between trade and finance. A disproportionate degree of trade invoicing in a currency leads to stronger demand for that currency. That depresses borrowing costs in that currency, which in turn reinforces demand for it. Meanwhile, the geoeconomics perspective links currency dominance to hard power. In this set up, a hegemon uses the strength of its domestic economy to underwrite safe assets – typically government debt. As foreigners are attracted to these safe and liquid assets, the hegemon strengthens its hold over foreign economies and generates an excess return. But the hegemon will also be tempted to overreach, to maximize its influence, and issue more assets than it can safely back. Two insights flow from these models: First, that currency decline may be inevitable once an economy passes its peak. Second, that the entanglements that arise from dominance can make that decline extraordinarily slow. Sterling’s decline illustrates both points. Britain was the trading powerhouse of the first era of globalization, accounting for 30 per cent of global trade in the later-19th century, over which period ‘60 per cent of world trade was invoiced and settled in sterling’. Arguably, Britain’s hard power peaked around the same point, between the Napoleonic and Boer wars. Yet from this late-19th century peak in Britain’s global dominance, sterling wasn’t definitively surpassed by the dollar until the immediate post-war years and played a meaningful global role well into the 1970s. That represents around a century of decline. It’s common to assert that this time is different, because there is no alternative to the dollar. But such an argument rests on the simplistic assumption that only one currency at a time can hold a dominant role. Sterling’s history offers a straightforward rebuttal to this argument. The most comprehensive historical estimates show not only that the dollar and sterling were close rivals in the interwar years, but also that sterling was rivalled by both the French franc and the German mark throughout its 19th century heyday – dominance doesn’t preclude serious rivals. A currency dominates when it is the unit of account for safe assets – and safety arises through scale and credibility, not through specific asset types or market structures. The more sophisticated version of this ‘no alternatives’ argument states that potential competitors to the dollar have serious flaws, for instance that euro assets lack the liquidity and market depth of dollar assets; and that the renminbi is largely closed to external investors. Yet it is easy to overlook two striking facts. First, the euro accounts for a larger share of trade-invoicing than the dollar, even if that largely reflects the scale of trade between Euro Area countries. Second, the euro comes a distant but stable second to the dollar in foreign exchange reserves, retaining its 20 per cent share even while the dollar share has tumbled from nearly 75 per cent to below 60 per cent over the past quarter century. Meanwhile, China and the Euro area are vastly larger trade partners than the US for most countries. A set of topical and technically feasible reforms, enhancing competitiveness and capital market depth and liquidity, could support a stronger role for the euro and renminbi. Linking back to sterling’s experience with rivals: the alternatives don’t have to be perfect to play a prominent role. A newer strand of argument in defence of dollar dominance appeals to technology. This argues that the rise of dollar-denominated stablecoins will sustain demand. But that misses the point as to which technology matters for currency dominance. Again, sterling provides an illustrative example. It’s commonly forgotten that sterling safe assets weren’t sovereign-issued – they were highly liquid trade bills, backed in the first instance by the private sector, but ultimately backed by commitments to low inflation, sound public finances and by the scale of the UK economy. Put simply, a currency dominates when it is the unit of account for safe assets. And safety arises through scale and credibility, not through specific asset types or market structures. …but decline is slow and meandering. Why was sterling’s decline so drawn out? A lot of people had a stake in preserving its value. It retained its global role after the Second World War partly because the dollar was scarce – but mostly because huge sterling balances had been accumulated during the war. It was in no one’s interest to liquidate those quickly, destabilizing the global monetary system and destroying asset values. Hence, a complex system of managed decline was constructed between the UK, holders of sterling and wider participants in the global economy. Equally, today dollar assets are widely held, making a sudden demise in no one’s interest. Related work Dollar dominance is surviving the Iran war – just about Sterling’s decline was drawn out – but that is not to say it was gradual. It was punctuated by a series of crises with global impact. In 1931 it brought down the gold standard; in 1949 it forced a reset of the Bretton Woods monetary system; and, in 1968 it brought Bretton Woods down altogether. Those global crises sat alongside domestic ones, including the ‘stop-go’ years, when the UK current account constrained growth and London was forced to repeatedly borrow from the BIS and IMF, culminating in the controversial IMF bailout of 1976. Does the end of dominance necessarily mean depreciation? Superficially, sterling’s history would suggest yes. At the onset of the First World War, one pound sterling bought $4.86; it hasn’t bought $2.00 since 2001. But the reality is more complex. After the war, Britain pursued loose monetary policy and financial repression leading to high inflation – not only were sterling assets less attractive, but they were prevented from adjusting to become more attractive.