The dollar's reserve share slides below 58% as central banks diversify, yet foreign investors bought $1.43 trillion of US assets last year. De-dollarization is a slope, not a cliff.
Fifty-five years ago this month, President Nixon closed the gold window. The move was presented as temporary. It became permanent and launched the dollar into a half-century of dominance nobody in that room would have bet on. Now, on the anniversary, the cracks are getting harder to paper over.
The Bretton Woods agreement pegged the dollar to gold at $35 an ounce, with everyone else pegged to the dollar. It worked until the late 1960s, when the US ran persistent balance-of-payments deficits and foreign central banks held more dollar claims than Fort Knox could cover. Nixon's 1971 announcement was followed by two years of failed half-measures. By 1973 currencies floated. The dollar did not lose its throne. Nothing else was deep enough, liquid enough, or legally robust enough to take its place. The mark and yen were regional currencies playing a global role they weren't built for. Sterling was already a memory of empire.
The early weaponization of the dollar, against the UK during the 1956 Suez Crisis, gave birth to the offshore dollar. Washington threatened to withhold IMF support and possibly sell sterling from its reserves unless the UK pulled out of Egypt. US banks started booking deposits in London to dodge domestic rate ceilings. Foreign holders, the Soviets included, parked dollars offshore to keep them out of Washington's reach. The Eurodollar system underpins global trade finance to this day. The Federal Reserve has standby liquidity swap lines with several major central banks and launched the Foreign and International Monetary Authorities repo facility in 2022, allowing approved foreign central banks to temporarily exchange Treasury holdings for dollars.
September 11 changed the calculus. Treasury's Office of Foreign Assets Control turned the dollar's centrality into an actual policy weapon, cutting terrorist financiers off from SWIFT and correspondent banking. That started as counterterrorism. It did not stay there. Iran, Venezuela, North Korea, Russia – they got fired from the dollar system. Secondary sanctions made sure other countries fell in line.
Freezing roughly $300 billion in Russian central bank reserves after 2022 was a different order of escalation entirely. The message landed everywhere, not just in Moscow. Dollar reserves, and euro reserves too, are not sovereign in any absolute sense. They sit at the pleasure of Washington and its allies. When the US then threatened Canada and Denmark, both NATO members, that drove the point home even harder. If treaty allies are not insulated, nobody is.
You can see the response building in the data. IMF COFER figures show the dollar's share of global reserves sliding from roughly 72% at the turn of the century to under 58% today. A recent Official Monetary and Financial Institution Forum survey found emerging-market central banks actively planning to trim dollar allocations over the next few years, with the euro and yuan the likely beneficiaries. Real curiosity is building around smaller currencies like the Singapore dollar. Gold is having its own moment. A net 30% of central banks surveyed expect to add to gold holdings over the next one to two years. For a reserve manager worried about confiscation risk, bullion is the obvious answer.
Yet this is not the whole picture. The US runs a current account deficit near $1 trillion a year. By simple accounting identity, foreigners have to absorb an equivalent volume of US assets: bonds, equities, real estate, direct investment. There is no way around this arithmetic. The money keeps showing up. Foreign investors bought $1.43 trillion of US stocks and bonds last year, up from $1.2 trillion in 2024 and $840 billion in 2023. That is not capital fleeing the dollar system. That is capital voting with its feet, over and over again, for dollar assets.
The real question is not whether foreign capital keeps showing up. It is which assets it buys and at what price. A rotation out of Treasuries into equities, or out of long-duration debt into bills, would hit the term premium and raise the cost of financing the deficit. That is the mechanism worth watching. Not some cinematic exit from dollar assets that never actually arrives. De-dollarization is a slope, not a cliff. The slope's angle matters here, not the direction.
The Bannockburn World Currency Index, composed of the currencies of the dozen largest economies, recouped about half of the 1.1% it lost in June. It rose 0.70% this year after a 3.7% gain in 2025, the first increase since 2020. The dollar itself was unchanged against the index. It accounts for about a third of the index and dampens the volatility of the BWCI. The other five G10 components rose against the dollar. The euro gained roughly 0.65%, the least among them. The yen rose nearly 2% after the Bank of Japan intervened on July 30, selling almost $53 billion, according to preliminary balance sheet data. The Federal Reserve checked prices and indicated it was doing so on behalf of the US Treasury, as was the case earlier this year.
The yen's sensitivity to interest rates is often misunderstood. The rolling 60-day correlation between changes in dollar-yen and changes in US two- and 10-year yields is 0.25-0.40. The correlation with changes in Japanese rates is less than 0.10. The correlation with US rates is greater than the correlation with the two- and 10-year interest rate differentials. The core measure of CPI in Japan has not been above the 2% target this year. Among the G10, only Switzerland has lower inflation. The yen reached a new 40-year low in late July before the intervention. The Japanese government opened a new front in efforts to support the yen and JGB market. It wants Japanese pension funds and households to boost domestic investment. Weekly data shows that Japanese investors have sold about JPY24.3 trillion of foreign bonds this year after purchasing JPY10.1 trillion in the same period last year.
Among emerging market components, the South Korean won was the strongest, rising about 7.7%. Its weight in the index is less than 2%. The Chinese yuan rose 0.25% after the PBOC gradually reduced the dollar's fix from CNY6.8109 at the end of June to a 3.5-year low of CNY6.7892 on July 30. China's Q2 growth disappointed at 4.3% year-over-year, its slowest since the end of 2022. The Russian ruble fell the most, losing about 1.15%. The Indian rupee fell about 0.75%.
The dollar fell against the G10 currencies in July except the Swiss franc. The greenback had been mixed until late in the month when the market took the dollar down after the FOMC failed to convince the market it was serious about reaching the 2% inflation target. Rhetoric has less heft than action. What was expected to be a hawkish hold saw US short-term rates fall despite three regional presidents dissenting in favor of an immediate hike. The following day, the Bank of Japan intervened. US Q2 GDP slowed to 1.5% from 2.1% in Q1, dragged down by trade and inventories. Real final sales to private domestic purchasers accelerated to 3.9% from 1.7%. Consumer spending rose 3.2%, the most in three quarters. The four-week moving average of jobless claims is below 200,000 for the first time in almost four years. Fed funds futures imply about 36 basis points of tightening, little changed on the month.
The euro rose about 0.7% in July, paring its loss to about 2.1% for the year. The regional economy continues to struggle under three shocks: China's growing market share, especially in autos, the energy shock from the war in the Middle East, and ongoing US tariff threats. The US has threatened an investigation into the EU's $1 billion fine on Google for self-preferencing, with a new levy the expected outcome. After stagnating in Q1, the eurozone grew 0.2% in Q2. Year-over-year growth is uninspiring at 0.5%. Inflation remains elevated at 2.9% in the preliminary July estimate. It was 1.9% before the Middle East war began.
Sterling's rally from the year's low in late June continued through mid-July, reaching a two-month high near $1.3560. It stalled amid a broader dollar recovery and fell back to $1.3300, meeting a technical retracement target. It recovered to almost $1.3500 at month end. Prime Minister Burnham announced several small measures meant to signal concern about affordability: removal of the value-added tax from electric bills, capping bus fares, and reduction of taxes for pubs and live music venues. The new government inherits a fiscal situation that leaves minimal flexibility. The government borrowed GBP2.7 billion more than the Office for Budget Responsibility forecast in the first three months of the new fiscal year. Higher market interest rates will boost debt servicing costs. After growing 0.6% quarter-over-quarter in Q1, matching the strongest since Q1 2024, the economy likely slowed to 0.1%-0.2% in Q2. The Bank of England stood pat at the July meeting. The swaps market has about a 30% chance of a hike at the next meeting in September.
The US dollar reached nearly CAD1.4250 at the end of June, its highest level since April 2025. As the US two-year premium over Canada narrowed, the greenback pulled back to slightly below CAD1.4000 in late July. After contracting in Q4 2025 and Q1 2026, growth appears to have returned in Q2, helped by increased government spending. US trade policy is still a headwind. It may intensify if the 50% tariffs threatened on CAD20 billion of Canadian products are implemented as soon as August 19. Under Prime Minister Carney's leadership, Canada is taking measures to diversify exports away from the United States. The Bank of Canada cut its overnight lending rate to 2.25% last October. It will likely remain on hold in the coming months. The swaps market is pricing in about a 70% chance of a hike before year end.
The Australian dollar recovered from a three-month low at the end of June to $0.7045 at the end of July. It has risen in four of the past five weeks and is up 5.25% this year, the second-best in the G10 behind the Norwegian krone. The Reserve Bank of Australia hiked rates three times between late February and late May. The economy remains resilient. June employment data and preliminary July PMI suggest the rate hikes have had minimal impact. Australia's goods trade balance is deteriorating. The May deficit of A$3.02 billion was the largest monthly gap since 2015. Exports fell 6.9% in May. The average monthly trade surplus fell to A$820 million in the first five months of 2026 compared with an average of nearly A$4.2 billion a month in the same period last year.
Within the broad consolidation seen last month, the dollar approached the upper end of the target range for the Mexican peso and remained slightly below the June high. At the end of the month, the dollar pushed through the shelf it had forged in the MXN17.35-MXN17.37 area and fell slightly through MXN17.3150. The Mexican economy found better traction in Q2. After contracting 0.6% in Q1, it grew 1.3% in Q2. Consumption slowed, as did government spending. The external sector improved. After recording a trade deficit of a little more than $1 billion in Q1, Mexico's trade balance swung back into surplus in Q2 to the tune of $10.87 billion, the largest quarterly trade surplus since the end of 2020. Headline and core inflation rates have slipped back into the 2-4% target range. The central bank meets on August 6. The swaps market has about a 40% chance of a hike discounted.
The JP Morgan Emerging Market Currency Index fell for the second consecutive month in July. It was the first back-to-back monthly decline since the end of 2024. The Chinese yuan rose about 0.5% on the month. Year-to-date the renminbi has appreciated about 3.5%, leading the region and ranking as the fourth strongest emerging market currency this year. The PBOC gradually reduced the dollar's fix over the course of the month. It fell from CNY6.8109 at the end of June to a 3.5-year low of CNY6.7892 on July 30. China's Q2 growth disappointed at 4.3% year-over-year, its slowest since the end of 2022. The average effective US tariffs on China appears to have fallen to 25.5%-26% from almost 34% at the end of last year, according to the Penn Wharton Budget model. The pending Section 301 excess-capacity investigation covering 16 economies including China could raise Chinese electronics rates by another 10 points before year end. The US and China are reportedly moving toward establishing investment and trade boards ahead of a likely trip by President Xi to the US in September.
Fifty-five years on, the dollar is still the world's number one reserve currency, the transaction currency of choice, and the ubiquitous unit of account. Something intangible has slipped away: trust. The weaponization of the dollar crossed a line somewhere along the way. The broader turn toward economic nationalism and short-run transactionalism has alienated the allies who used to provide the system's quiet stability. Expect the erosion in reserve share to continue, even at glacial speeds. Expect alternative payment systems to keep chipping away at pieces of monetary sovereignty. A genuinely multipolar currency order, if it ever arrives, is a story measured in years, not months. The dynamic is bigger than any single election cycle. It is bigger than any single administration.
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