BY COMFORT OGBONNA
Investors have rushed into the U.S. dollar this week as rising tensions in the Middle East triggered widespread market volatility, highlighting how fragile the transition away from a dollar-dominated financial system could be.
The growing conflict across the region—following the joint military assault by the United States and Israel against Iran—has sent investors scrambling for safety. In times of global uncertainty, the dollar remains the most liquid and widely trusted financial asset, driving a sharp increase in its value as traders and institutions seek stability.
The surge in demand for the greenback has also triggered turbulence across global financial markets. Several stock markets that had performed strongly earlier in the year have experienced steep losses. For example, South Korea’s benchmark KOSPI index—after soaring nearly 50% during the first two months of the year—plunged almost 20% in just two trading sessions.
At the same time, redemptions from private credit funds have accelerated, the dollar has jumped by as much as 2% in a matter of days, and yields on U.S. government bonds have moved sharply higher as investors reposition their portfolios amid the uncertainty.
According to Matt King, founder of Satori Insights, the rapid appreciation of the dollar is not being driven by major changes in economic growth or inflation expectations. Instead, he says the movement is largely the result of powerful capital flows as investors unwind speculative positions and rush to hold cash and highly liquid assets.
In periods of crisis, he noted, global investors still turn to the dollar despite long-standing concerns about its future dominance.
The current turmoil also raises deeper questions about how the global financial system might function during future crises if the gradual decline in the dollar’s dominance continues.
For more than two decades, the U.S. currency’s position as the unquestioned center of the global financial system has slowly weakened. That process began with the launch of the Euro in 1999 and accelerated after China joined the World Trade Organization in 2001.
Data from the International Monetary Fund shows the dollar’s share of global foreign-exchange reserves has declined to about 57% today, down from more than 70% in the early 2000s.
Despite that gradual decline, global dollar liquidity has continued to grow over time, helping the international financial system absorb major shocks such as the 2008 Global Financial Crisis and the market turmoil triggered by the COVID-19 pandemic in 2020.
However, many analysts warn that the foundations supporting dollar dominance—strong U.S. alliances, the rules-based global order and the forces of globalization—are beginning to weaken. Over the past year, rising geopolitical tensions, trade disputes and military conflicts have turned the global economic environment into a far more uncertain landscape.
This backdrop coincides with the upcoming release of a new book by Barry Eichengreen, an economist at University of California, Berkeley and a leading authority on global currencies and capital flows. His book, Money Beyond Borders: Global Currencies from Croesus to Crypto, explores the long history of global money systems and the factors that determine why certain currencies rise to prominence and eventually decline.
In the book, Eichengreen traces more than 2,500 years of monetary history, examining how dominant currencies—from ancient coinage to modern digital assets—have shaped global commerce and finance.
While he argues that no clear challenger currently exists to replace the U.S. dollar as the world’s primary reserve and trading currency, he also warns that its gradual decline could eventually accelerate.
“I’m much more worried than I used to be,” Eichengreen said, noting that while there is still no obvious alternative to the dollar, the world is becoming increasingly unpredictable.
Recent market movements underline just how critical the dollar remains. According to the Bank for International Settlements, the U.S. currency is involved in about 89% of all foreign-exchange transactions worldwide—the highest level recorded in the past 25 years. The euro, the next most traded currency, appears in roughly 29% of global FX transactions.
The dollar also dominates international payments. Studies by the Federal Reserve suggest that about half of all cross-border payments are conducted in dollars. When transactions within the eurozone are included, the dollar’s share of global payments rises to nearly 60%.
Similarly, around 55% of international and foreign-currency bank claims and about 60% of liabilities are denominated in dollars, reflecting the currency’s central role in global finance.
Even in energy markets—where some countries have been trying to diversify away from the dollar—the U.S. currency still dominates. Analysts estimate that roughly 80% of global crude oil trade continues to be priced in dollars, with the remaining share conducted in other currencies such as the euro or the Chinese yuan.
Eichengreen says he has long believed that a more diversified, multi-polar global monetary system could ultimately benefit the world, much like biodiversity strengthens natural ecosystems.
However, he cautions that the global economy may not yet be ready for such a transition. At present, there are few alternative sources of liquidity large enough to replace the role currently played by the U.S. dollar.
As geopolitical tensions rise and conflicts spread across key regions, the world could be entering a delicate phase where the dollar remains dominant—but the systems supporting it are under increasing strain.
With trade disputes and military confrontations escalating simultaneously, the challenge for global markets will be navigating a financial system that may be slowly changing, but still depends heavily on the stability of the U.S. currency.
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