De-dollarization: myth or reality?

Anatomy of a fall: the privilege of the dollar abolished? Myths and realities of de-dollarization

The atypical nature of the movements seen on the US government debt and dollar markets, triggered by the announcement of reciprocal tariffs, raises a number of questions. Usually associated with safe-haven assets in times of market confidence shocks, the dollar and treasury bills failed this time to play their role as protective assets, posting sharp declines. These unusual trends call into question what is referred to as the dollar's “exorbitant privilege”, and allow us to qualify in this note the supposedly de-dollarisation at work.

The exorbitant privilege that has characterized the US dollar for over half a century stems from the structure of the globalized economy. The greenback has been used as a reserve asset, a unit of account for a large proportion of energy commodities, and is highly liquid, given the depths of the US government debt market ($910bn traded daily on average) and the dollar market ($6,600bn traded daily). For decades, there has been a marked appetite for this currency from international investors seeking exposure to dollar-denominated assets, either through treasury bills or through the equity of US companies.

The effect of this mechanism is to drain part of the world's savings (particularly European savings) to finance the balance of payments deficits on the other side of the Atlantic. Can we really affirm our era will witness a global de-dollarization in exchanges?

Structural imbalances: US savings insufficient to cover total demand in the economy

The concept of twin deficits is often used to describe imbalances in the balance of payments and the current account. This paradigm characterizes the US economy in disequilibrium both in public finances (the State cannot cover its expenditure with the revenues it derives from the domestic economy alone) and from the private point of view, where the balance of goods, services, income and current transfers is also in deficit (Figure 1). By accounting equivalence, this private balance deficit is identified with an imbalance produced by insufficient national savings to cover the uses of domestic agents (investment).

Figure 1: Twin deficits in the United States (% GDP)

The US administration's new doctrine seems to be geared a priori towards weakening the dollar to make domestically produced goods more competitive. This partial equilibrium reasoning, coupled with the stated desire to reduce deficits, renders the first obsolete: a fall in deficits would lead to a shortage of currency (in terms of issuance) which, at constant demand, would trigger a dollar appreciation. Demand accompanying a fall in the money supply would lead to a stable equilibrium but could not yield a lasting depreciation. Taking a closer look at the financing structure of the US economy, demand for the dollar does not seem to disappear.

The financing structure of the US economy leads to chronic apathy for the greenback

Figure 2 shows the OECD economies that have structural excess of savings across all their domestic institutional sectors (households, businesses, public administration), i.e. those that are structural providers of capital and those that, conversely, are structural debtors. For ease of comparison, the amounts of annual supply or need for financing are computed as share of annual domestic GDP. We see that the Netherlands provides more than 20% of its GDP in net financing, while Greece has a structural borrowing need of around 8% of its GDP. In 2022, the United States also had a financing need, i.e. an inflow of domestic currency, of more than 3.4% of its GDP (the most recent figures published by the OECD), amounting to 910 billion dollars.

Figure 2: Excess domestic savings/net financing requirements (Net financing (+) / Net borrowing (-) by all domestic agents), OECD (% of GDP 2022)

Non-negligible quantities of excess savings, particularly in the Eurozone, end up financing the structural needs of the US economy, its investment and, by extension, its associated productivity gains. Those excess savings might have no outlet in European domestic investment (from which the Continent and its need for autonomy could benefit from). The privilege of the US economy therefore lies in its ability to drain money flows from the rest of the world to finance its investments, which are a source of potential growth. This in turn creates a demand for the dollar which maintains a structural overvaluation and fuels a certain privilege.

The share of the rest of the world in financing the US economy has not weakened, and demand remains positive

The US current account has faced a deficit for over 30 years. What is the financing structure of the US economy? The answer to this question helps to validate or invalidate the de-dollarization question. Some see the gradual withdrawal of the dollar from some central banks foreign exchange reserves, in favor of gold and other currencies, as a rejection of the greenback. Figure 3 shows the share of the rest of the world in the US economy financing through the financial accounts of households, corporations, the Federal State and its local jurisdictions. The quantities represented express the share of the rest of the world in the US domestic agents financing by investment vehicle (public debt, equity, total). For government debt, we also represent the shares of the domestic financial sector and the non-financial one (households, non-financial companies, local authorities).

The most striking feature of the first chart is the gradual withdrawal of the rest of the world from domestic bond financing since the Great financial crisis. Foreign investors now hold only a third of the US government debt issued. This trend is primarily attributable to the intervention of the Federal Reserve through its various quantitative easing plans. The narrative of the gradual disengagement of the rest of the world could also be a reasonable explanation, except that the share of the rest of the world in the total financing of the US economy (all vehicles included, right-hand side graph, grey curve) has been growing steadily for 70 years.

Figure 3: Structure of US government debt ownership (lefthand side) and Rest of the world share in equity/total financing of US economy (right-hand side)

Growing world investor interest in US institutional equity seems to be driving this trend. More generally, many comments and speculations about massive sales of debt securities by the Chinese authorities were made. This was supposed to be a response to the reciprocal escalation in tariffs. Although the share of China + Hong Kong in the amount of debt held by the rest of the world has been falling for several years, it is worth remembering that these holdings represent only 2.6% of the total amount of US debt issued. The major European countries hold 5.5%, while Japan and the United Kingdom account for 3.8% and 2.6% respectively.

Against this backdrop, it is hard to see the end of a privilege or to suppose that de-dollarization is accelerating. We face an economy that manages to maintain investor appetite for its assets and financing needs. The dollar thus remains a reliable and necessary investment vehicle. It does not appear to be substitutable in the medium term neither as the use of the dollar remains massive. Despite the new US administration's chaotic macroeconomic policies, which are causing market upheaval and affecting investors, we must not lose sight of the fact that the dollarized world is based on a cooperative equilibrium that's hard to shake.

Written in May 2025