Beijing’s more flexible exchange rate reduces the need to hoard dollars. Gulf rulers are pouring billions into mega-projects at home and taking more risks with investments abroad – money they no longer park in US government bonds.
Of course, the dollar retains formidable strengths. The world’s largest economy, the deepest financial markets and the strongest military are all powerful reasons for resilience. Investment commitments that US President Donald Trump has withdrawn from major countries and companies ensure that money flows to the US.
In many respects, the dollar remains the world’s dominant currency. Yet one metric tells a different story. At the turn of the century, the dollar accounted for more than 70 percent of global currency reserves. Now it is less than 60 percent. If the eurozone were not so fragmented and the Chinese financial system not so closed, alternatives would be more attractive and the decline faster.
That is important for America. In the past, China and the Middle East reliably recycled their savings into the US debt market. Their peak reserves of nearly $5 trillion have lowered U.S. borrowing costs by about half a percentage point, saving taxpayers billions in mortgages and auto loans and making it cheaper for companies to pour money into new ventures.
Not anymore. China has already stopped buying dollars. The company may start selling them in the future. A gradual withdrawal would slowly raise US interest rates. A rapid decoupling could shock markets. In the Persian Gulf, cheaper oil and lavish spending will drain surpluses and reduce flows to the US. The reduced dominance of the dollar also reduces its usefulness to Washington as an instrument of economic statecraft.
Structural forces that kept the dollar high, U.S. borrowing costs low and strong sanctions on the Treasury Department are turning. The consequences will be far-reaching.
Why the dollar’s grip is waning
In 2005, future Federal Reserve Chairman Ben Bernanke offered an explanation to a riddle: Why did long-term interest rates continue to fall even as the Fed raised rates? His “global savings glut” hypothesis argued that surplus countries like China and Gulf oil exporters recycled large profits into U.S. debt, boosting demand and making life cheaper for U.S. borrowers.
Twenty years later, the dollar is still the world’s reserve currency, yet the dynamics are changing. China’s reserves peaked at $4 trillion in 2014, but have since fallen to $3.3 trillion. The Gulf has built nearly $800 billion in trade surpluses since 2017, yet reserves are flat.
The withdrawal from dollar assets is expected to continue, driven by global and domestic forces. On the global side, the picture is clear:
• US assets no longer inspire the same confidence they once did. The national debt is high and rising. Washington imposes tariffs on allies and adversaries. Political mismanagement leads to government shutdown. The White House openly challenges the independence of its own central bank, raising fears that high inflation will erode the value of dollar investments.
• The dollar was once a shield. Now it’s a sword. Following Russia’s invasion of Ukraine in 2022, the US and allies froze $300 billion in Moscow’s assets. That move proved that Washington is willing to use the currency for geopolitical pressure — a warning that China and Gulf reserve holders cannot ignore.
• Chinese and American interests are drifting further apart, fueling Beijing’s concerns about the security of its Western investments. In West Asia, Israel’s attacks on Qatar are the latest example of the breakdown of the “energy for security” pact that has tied the Gulf states closely to the US for decades.
These global forces are amplifying the country-level shifts that are already underway.
China’s rigid peg to the dollar once required massive purchases of government bonds to stabilize its currency. Since the mid-2010s, Beijing has moved to a dirty exchange, with fewer interventions, which greatly reduces the need to hoard liquid dollar assets. China is also leading a shift away from the dollar in global trade, with emerging markets increasingly turning to local currencies. The yuan’s share of Chinese trade invoicing rose from just 2 percent in 2010 to 25 percent in 2023.
Current account surpluses are also shrinking, leaving less cash to recycle to global markets. China’s balance has fallen to 2.3 percent of gross domestic product in 2024, from almost 10 percent in 2007. In some oil states, the shift is even more pronounced: Saudi Arabia has switched from lender to borrower.
Rising domestic spending is depleting the petrodollar pool that the Gulf once invested abroad. Qatar has invested $300 billion in preparation for the 2022 World Cup. Saudi Arabia may invest more than $1 trillion in futuristic cities, sports and entertainment. And oil money once parked in safe US debt is now chasing riskier bets. With revenues under pressure and spending rising at home, the Gulf’s sovereign wealth funds are directing their capital toward stocks, mines and real estate rather than simply lending to the U.S. government.
Want to make money easily from abroad? Not anymore
Looking ahead, the Gulf is unlikely to dump the dollar. The shift away from the dollar will remain gradual due to currency pegs and security relationships. Trump’s willingness to punish even the smallest signs of de-dollarization reinforces this barrier. Yet Washington cannot expect increasing support either. Falling oil prices and Gulf domestic priorities mean the declining focus on the dollar will continue.
China’s dollar supply can only go one way: down. The end of reserve accumulation and the declining need for dollar-based commercial invoicing and foreign exchange market interventions are driving divestment. The main brake? Finding markets sufficiently liquid to absorb the enormous size of its reserves. We are investigating two possibilities:
• A gradual decline in Chinese dollar holdings, driven by the growing trading role of the yuan and China’s own economic mass – and not by geopolitics. Based on a model developed by International Monetary Fund economist Serkan Arslanalp and others, we see the dollar’s share of China’s reserves falling from 58 percent today to 24 percent in 2050.
• Geopolitical tensions leading to rapid financial decoupling. One reference is Russia’s accelerated effort to cut ties with the US currency. From the end of 2016 to the end of 2021, the dollar’s share of Russia’s reserves fell from 40 percent to 11 percent. Should China follow a similar path, its holdings of dollar assets would drop to almost zero in a short time.
The era of easy foreign savings flowing into dollar assets, suppressing US borrowing costs and giving Washington a powerful sanctions mechanism, is slowly coming to an end. That points to higher interest rates on the horizon, making the U.S. debt burden heavier, making investments more expensive at home and limiting policy choices abroad.
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Published on November 19, 2025
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