Currency crossroads: What comes after the dollar?
Global currency power is shifting: the dollar’s dominance is under threat as the Euro, digital finance, and fragmentation reshape the monetary order.
In 30 seconds
The US dollar’s historic ‘exorbitant privilege’ has eroded, signalling a potential shift in global monetary leadership and increased volatility.
The Euro is the most plausible challenger to the dollar, but structural weaknesses – from fragmented banking systems to lack of a safe asset – limit its global reach.
Digital finance innovations like CBDCs and stablecoins could reshape currency power, but regulatory gaps and technological risks mean uncertainty dominates the landscape.
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For nearly a century, the US Dollar has been the cornerstone of the global financial system – a safe haven in crises, a universal medium of exchange, and a store of value for governments and investors alike. But according to Hélène Rey, Lord Bagri Professor of Economics at London Business School, that supremacy is no longer assured. Speaking with Sergei Guriev, Professor of Economics and Dean of London Business School, on the latest episode of Think Ahead, Rey explored why the world may be entering a new era of monetary fragmentation and what that means for business leaders.
The dollar’s ‘exorbitant privilege’ and its erosion
The dollar’s dominance has long conferred what economists call an ‘exorbitant privilege’: the ability of the US to borrow cheaply and invest globally at higher returns. The US would issue safe short-term debt while holding riskier assets abroad. But that advantage has all but disappeared. Today, this exorbitant privilege is close to zero.
Combined with rising US debt levels and unpredictable policy, this signals a shift in the global financial equilibrium. Rey warns that we may be approaching a “Kindleberger Gap” – a reference to the interwar period when sterling was in decline and the dollar had yet to assume full leadership. “If we are in a situation where the US does not want to be or isn’t able to be the hegemon anymore, then we are close to that gap,” she notes, warning that such gaps breed uncertainty.
Cracks in the dollar’s armour
Recent events underscore this fragility. Historically, market stress triggered a flight to safety into US treasuries and a stronger dollar. Yet in 2025, following the so-called Liberation Day tariff shock, the opposite occurred: the dollar weakened and US bond yields rose. Investors sought alternatives, challenging assumptions about the dollar’s resilience.
If the dollar’s dominance wanes, what comes next? The Euro is the most plausible contender, given the size of the European economy and its developed financial markets. But structural weaknesses – from fragmented banking systems to the absence of a true eurozone-wide safe asset – limit its global reach. Without deeper integration and predictable issuance of joint bonds, the Euro cannot fully rival the dollar.
China’s renminbi faces even steeper hurdles, constrained by capital controls and underdeveloped financial markets. Meanwhile, gold and cryptocurrencies remain speculative rather than systemic. “Bitcoin is not money,” Rey insists. Bitcoin lacks the attributes of a medium of exchange, a unit of account, and a store of value. With crypto assets far from being stabilised, their place as a possible contender to the dollar remains in flux, said Rey.
Digital finance: Disruption or reinforcement?
Technology adds another layer of complexity. Stablecoins and central bank digital currencies (CBDCs) could reshape payment systems and liquidity flows. US regulators, for instance, see US dollar stablecoins as a way to sustain demand for US treasuries. Yet Rey cautions that these instruments carry risks – from opaque balance sheets to the absence of lender-of-last-resort protections. “We are in a jungle of cryptos and different technologies,” she says. “The legal and regulatory frameworks are still evolving.”
Longer term, interoperability between CBDCs and regulated digital instruments could create robust alternatives. But quantum computing and cyber risks loom large. “The players who build resilience will win,” Rey predicts. As proclaimed by French economist Jean Monnet, a founding father of the EU, “Europe will be forged in crisis” – so could this be the Euro’s moment?
What business leaders should do now
For global firms, the implications are clear: prepare for volatility. Hedging currency exposure is no longer optional. The world where everyone piled into the dollar and enjoyed high returns is gone. Companies should also scrutinise the quality and legal underpinnings of any digital payment tools they adopt. In an unsettled landscape, governance matters as much as technology.
Rey’s closing message is stark: fragmentation is the defining trend. For policymakers and business leaders alike, the challenge is to navigate a world where monetary power is contested and certainty is in short supply.