Paul Krugman & LBS’s Hélène Rey on the Dollar’s Power and Europe’s Moment

In a recent encounter, “Talking With Hélène Rey,” Nobel laureate Paul Krugman joined Lord Bagri Professor Hélène Rey for a frank examination of the United States dollar’s status as the world’s reserve currency, and the signs it may be entering a period of reassessment.

Rey noted an unusual pattern: the dollar has been weakening even as US equity markets decline and Treasury yields rise, a break from its long-standing role as a safe haven in times of stress. She argued that the shift reflects a gradual erosion of confidence in US policy and the institutions that underpin it.

Central to the discussion was the so-called “exorbitant privilege” the US has enjoyed for decades: the ability to borrow cheaply in its own currency while investing globally at higher returns. This implicit form of global banking has allowed the US to refinance itself at low cost even in times of crisis.

The conversation turned to the euro, which Rey described as the dollar’s nearest rival but still hampered by incomplete fiscal and monetary integration. Despite progress since the eurozone’s debt crisis, Europe’s fragmented bond markets and evolving institutions continue to limit its potential as a true counterweight to the dollar.

Krugman and Rey also examined the strategic role of payment systems, with US platforms such as Visa and Mastercard maintaining a powerful grip on global transactions. Rey pointed to the accelerating push toward central bank digital currencies as both a technological necessity and a geopolitical imperative, with the potential to reshape monetary control in an era defined by data, crypto assets and financial cyber-risk.

Rather than predicting the end of dollar dominance, Rey warned of a more likely scenario: a fragmented global monetary landscape in which no single safe asset or reserve currency commands universal trust, leaving the system more volatile and vulnerable to shocks. She argued that this moment offers Europe a chance to assert greater monetary and technological sovereignty by strengthening the euro, investing in alternative markets and refining its macroprudential toolkit. In a shifting world order, she suggested, the next phase of currency politics may be less about replacing the dollar and more about building resilience against its weaknesses.