The year 2026 will be a year in which the dilution of the US dollar – the silent erosion of its global dominance as countries trade and pay for alternatives – begins to accelerate. The more Washington uses the dollar as a weapon, the more the world looks for ways to circumvent it.
America’s share of world trade has increased fallen from one third in 2000 to just one quarter today. As emerging economies trade more among themselves, the dollar plays a smaller role in the flow of goods. Indian and Russian trade is currently settled in rupees, dirhams and yuan. More than half of China’s trade now goes through CIPS, China’s own cross-border payments system, rather than SWIFT, the global messaging network long dominated by Western banks. Other trade partnerships such as Brazil-Argentina, United Arab Emirates-India and Indonesia-Malaysia are also piloting local currency settlements.
At the same time, central banks around the world are beginning to accumulate reserves in currencies other than the dollar. An invented dollar 72 percent world reserves in 1999. Today it all comes down to 58 percent— and falling. A currency is only unthreatening when it is perceived be unthreatening. But perceptions are changing.
Increasing US budget deficit – forecast for $1.9 trillion in 2025 – with the widening current account gap, estimated at approx 6 percent GDP, escalate pressure on the dollar. In addition, there is excessive exploit of the “printing press”, which means the creation of enormous amounts of recent money to finance spending. These trends, once tempered by the dollar’s “exorbitant privilege” as the world’s dominant reserve currency, now raise questions about global confidence in the dollar.
Even the U.S. Treasury market, once considered infinitely liquid and widely accepted as a pristine form of security, has lost its luster. It’s over for now 27 trillion dollars in US treasury bonds – loans from investors to the government, backed by the full faith and credit of the United States – circulating in the global financial system. This means more bonds to trade, more to settle, more to repo and more to absorb on dealers’ balance sheets. However, enormous financial institutions such as JPMorgan, Citi and Goldman, which were the primary dealers providing liquidity, did not scale appropriately. Currently, if everyone wants to sell, there are not enough balance sheets to absorb the sales – unless the Fed steps in. This has been the case since the Treasury bond market crash in March 2020, which marked the historic failure of the world’s most liquid and trusted market – U.S. Treasuries – to function at a challenging time without central bank intervention.
In 2026, the real threat to the dollar may not come from a single competing currency. Instead, it will come from alternative payment and settlement systems built to bypass dollar-based channels – particularly in emerging markets that have never enjoyed the full security of dollar liquidity or reliable access to dollar networks.
The race to design alternatives is heating up. One such alternative is mmost— a project in which central banks in China, Hong Kong, Thailand and the United Arab Emirates are working with the Bank for International Settlements to build a system that will allow countries to instantly make payments to each other using their own digital versions of national currencies. Another is BRICS are payingwhich would enable the BRICS+ countries – Brazil, Russia, India, China, South Africa and their recent members – to send money to each other for trade and investment purposes directly in their own currencies. They aim to make trading faster, cheaper and less dependent on the dollar.