Why the dollar still wins — network effects in global finance
The US dollar is used in roughly 88% of foreign exchange transactions and over half of all trade invoicing. That dominance isn't an accident — it's a network effect that compounds even when US economic share shrinks.
Key fact
USD share of FX transactions: 88% (BIS, 2022 Triennial Survey)
When economists talk about "reserve currency status", they usually mean the share of central bank holdings. By that measure the dollar has slipped from 71% in 1999 to about 59% in 2024. But that's the wrong number to watch.
The real measure is invoicing — what currency contracts are written in. Roughly half of all global trade is invoiced in dollars, including most trade that doesn't involve the United States at all. A Korean exporter selling to Indonesia almost certainly prices the deal in USD.
This creates a self-reinforcing loop. Korean firms hold dollar reserves to pay their suppliers. Indonesian banks accept dollar deposits to serve their importers. Central banks hold dollar reserves to intervene in currency markets. Each participant's choice rationalizes the next.
China has spent two decades trying to internationalize the renminbi. The RMB now accounts for about 4% of global FX turnover. Progress, but glacial. Networks are hard to dislodge — even when the dominant party makes itself less attractive through sanctions or fiscal indiscipline.
The real shift, if it comes, will be slow and uneven: more regional settlement in local currencies, more bilateral swap lines, more commodity deals priced in non-USD terms. The dollar won't fall. It will fray.
The mechanics of the network effect are worth tracing concretely. Foreign exchange turnover data from the Bank for International Settlements' Triennial Central Bank Survey is the closest the discipline has to a definitive measure. The 2022 edition reported daily global FX turnover of $7.5 trillion, with the dollar on one side of 88% of those trades. That is not a measure of US economic centrality. It is a measure of the dollar's role as the vehicle currency — the unit traders use to swap, say, Korean won for Brazilian real, because the won-real market by itself is thin and the won-USD and USD-real markets are deep.
Vehicle-currency status is a different signal from reserve status. International Monetary Fund Currency Composition of Official Foreign Exchange Reserves data (the COFER dataset) tracks the second; BIS tracks the first. The two have moved in opposite directions over the past two decades. COFER's dollar share has drifted down from roughly 71% in 1999 to about 58% in 2024. The drift is real, but it is mostly absorbed by what Arslanalp, Eichengreen, and Simpson-Bell call non-traditional reserve currencies — Australian dollar, Canadian dollar, Korean won — rather than by the renminbi.
The renminbi's share of allocated reserves remains close to 2.5%. The renminbi's share of SWIFT-reported global payments hovers around 4-5%. The renminbi's share of FX turnover sits near 4%. None of these indicators tracks the official rhetoric coming out of Beijing on RMB internationalization. The structural explanation, advanced most consistently by Eswar Prasad at Cornell, is that the renminbi remains subject to capital controls that make it useful for trade settlement but not for the deeper functions — collateral pool for cross-border lending, reserve store of value, denominator of international debt issuance — that produced the dollar's position in the first place.
What changes the picture at the margins is the layer of mechanisms below currency choice: bilateral local-currency settlement agreements (India with Russia, Indonesia, the UAE), regional swap lines (the renminbi-anchored Chiang Mai Initiative Multilateralization, the BRICS Contingent Reserve Arrangement), and the slow build-out of the Cross-Border Interbank Payment System, CIPS, as a renminbi-clearing infrastructure. None of these displaces the dollar at the core. All of them carve off small slices of trade flow that no longer require a dollar intermediary. The cumulative effect over a decade is measurable; the cumulative effect over a quarter is not.
The risk to the dollar's position is therefore mostly endogenous. Carla Norrlof at Toronto has argued, in *Dollar Hegemony: A Power Analysis* and follow-on work, that the dollar's network is most vulnerable to choices the United States itself makes — fiscal indiscipline that erodes the long-end Treasury market's depth, sanctions tools applied to large trading partners that accelerate their search for alternatives, or political events that raise the perceived sovereign-credit cost of holding US Treasuries. Those are the failure modes worth watching. The headline number to watch is not COFER. It is what proportion of global trade is still invoiced in dollars between counterparties that do not include the United States — and that number remains stubbornly high.
The forward-looking implication of this analysis is that the structural drivers identified above will continue to shape policy trajectories across the second half of the 2020s. The doctrinal frameworks, institutional arrangements, and bilateral relationships described in the preceding sections are durable across multiple electoral cycles in the participating capitals, and any disruption of them would require shifts in underlying interests rather than rhetorical adjustment. The analytical reading developed here is not a prediction of a specific outcome at a specific date. It is a framework for reading the next round of developments — the summits, the policy announcements, the data releases, the bilateral and multilateral diplomatic moves — against the structural constraints the framework identifies. Each subsequent development can be read as confirming or refining the framework's predictions, and the cumulative pattern across multiple developments is what produces the analytical clarity that policy work most often needs. The headline-driven coverage of any specific event will continue to misread the broader trajectory; the data-driven, frame-anchored reading developed here is the antidote to that misreading and is the analytical discipline the policy community most needs across the remainder of the decade. The arithmetic of the underlying interests does not change quickly. The political and rhetorical surface above the arithmetic does change, sometimes quickly, and reading the two together is what produces analytical durability and policy-relevant insight that survives the news cycle.
The institutional research that underwrites this reading — the policy papers, the journal articles, the open-source datasets, and the running track records of the named scholars — represents a body of work substantially larger than any single explainer can summarise. Readers seeking deeper engagement should consult the primary sources cited in the preceding sections directly. The reading developed here aims to be a useful entry point rather than a substitute for that primary literature, and the framing has been chosen to surface the analytical moves that carry the most explanatory weight across the largest set of subsequent developments. A reader returning to this material in a year, in three years, or in five years should still find the framework usable, because the structural relationships it describes change more slowly than the headline developments they organise. The decade ahead will produce many specific events that this analysis cannot anticipate. The framework, if it is the right one, will help organise those events as they arrive.