The U.S. Dollar Is the World’s Reserve Currency. Why Does That Matter?
The U.S. dollar is the primary reserve currency for the world’s financial system — but what does that mean, and why is it important to the United States’ public finances?
The U.S. dollar has served as the world’s primary reserve currency for more than 80 years — a privileged status that carries with it significant benefits for our domestic economy. The country's unsustainable fiscal outlook, however, threatens to diminish the dollar’s standing, which would have damaging fiscal and economic consequences for the United States.
What Is a Reserve Currency?
Reserve currencies are safe and stable currencies held by central banks and investors across the world as part of their official exchange reserves. Reserve currencies are distinguished by their ability to maintain value and be easily transacted. They have historically been based in countries that have large domestic economies, stable governments, sound macroeconomic and fiscal policies, and large, open financial markets. Reserve currencies are easily convertible and are used to anchor the value of other currencies; holding them allows countries to weather economic shocks, service debts, moderate the value of their own currencies, and support domestic companies' purchase of imports. While the U.S. dollar is the most held and most important global reserve currency, there are several other currencies that also serve as reserves, albeit with much lower volume, including the British pound, Chinese renminbi, the euro, and Japanese yen.
What Makes the U.S. Dollar the World’s Primary Reserve Currency?
The U.S. dollar has officially been considered the world’s primary reserve currency since it overtook the British pound’s position in the Bretton Woods Agreement of 1944. While the British pound was the global reserve currency in the 19th century, World War I and II triggered economic distress in England, while the United States’ economic and political influences were increasing rapidly. Since 1944, the U.S. dollar has maintained its status because of the United States’ stability, large gross domestic product (GDP), unmatched geopolitical influence, and liquid and dynamic capital markets.
Currently, the U.S. dollar is the most used global currency. The U.S. Federal Reserve publishes an index of international currency usage, combining a weighted average of five measures: official currency reserves, foreign exchange transaction volume, foreign currency debt issuance, foreign currency and international banking claims, and foreign currency liabilities. In 2024, the U.S. dollar had an index value of 66.6 whereas the next most used currency, the euro, had a value of 23.8.
According to recent research published in the Journal of Financial Economics, key factors in the U.S. dollar’s strength are its high usage in global savings (the currency held by companies, central banks, and other major financial institutions) and high investor demand (the worldwide market’s appetite for buying dollar-based assets, such as U.S. Treasury bonds).
How U.S. Fiscal Policy Benefits From Having the Global Reserve Currency
The reserve status of the dollar provides two critical benefits to the U.S. fiscal condition: lower borrowing costs and higher borrowing capacity.
Global demand for dollars in turn creates demand for U.S. sovereign debt. To acquire dollars, central banks and other market participants purchase and hold U.S. sovereign debt, which is issued in the form of Treasury securities. While the price of U.S. Treasuries fluctuates due to a number of variables, this increased demand in Treasury securities pushes interest rates on Treasury securities lower than they would be if the U.S. dollar was not the global reserve currency. One prominent economist estimated that the reserve currency status decreases interest rates by 10 to 30 basis points.
Another benefit of the increased demand for U.S. debt due to the U.S. dollar’s reserve status is its impact on overall borrowing capacity. Greater demand allows the United States to borrow more than it otherwise would. Put simply, the U.S. dollar’s attractivness means it is easier to sell large amounts of U.S. treasuries without incurring additional interest costs. A 2024 paper from the National Bureau of Economic Research posits that the reserve currency status of the dollar increases the debt the U.S. government can accumulate by 22 percent. That advantage is especially powerful in times of economic stress.
Is the U.S. Dollar’s Role as a Global Reserve Currency at Risk?
While the U.S. dollar has so far maintained its status as the global reserve currency, there are signs that this position may be eroding.
A central tenet that supports the U.S. dollar’s reserve status is the confidence in the stability of the U.S. government and its institutions. While the United States remains a very stable nation, domestic political trends and increased polarization in Congress have made it more challenging to implement legislation in key areas. First and foremost, that polarization has made fiscal reform difficult. The country’s total deficit is currently 5.8 percent of GDP and is projected to increase over time. By 2036, the United States will run a deficit of approximately $3 trillion, of which more than $2 trillion will be attributed to net interest costs.
Rating agencies have taken note of rising debt. In 2025, Moody’s Rating became the final of the three major credit rating agencies to downgrade the U.S. credit rating (following S&P in 2011 and Fitch in 2023), citing an inability of the nation’s policymakers to address large and growing deficits. The United States’ imbalance between spending and revenues undermines the perception of the United States (and its currency) as stable, which is the bedrock trait of a reserve currency.
While it is unlikely that a single currency will dethrone the U.S. dollar as the primary reserve currency, the privilege the U.S. taxpayer enjoys from the U.S. dollar’s status may nevertheless decline if global economies reduce their demand for U.S. dollars generally. The most plausible potential alternatives to the status of the dollar are China’s renminbi, euro area’s euro, and cryptocurrency — all of which have drawbacks compared to the U.S. dollar. For example, while China and the euro area comprise the world’s second- and third-largest economies, their respective currency markets remain substantially smaller than the U.S. dollar. As for cryptocurrencies, they are not broadly perceived as sufficiently safe stores of value to supplant the dollar.
Conclusion
The United States continues to enjoy significant fiscal benefits due to the U.S. dollar serving as the world’s reserve currency. Global demand for U.S. dollars contributes to lower interest costs and greater borrowing capacity, particularly in times of global economic distress. While the U.S. dollar has so far maintained its reserve status, political gridlock and our deteriorating fiscal outlook threaten to deteriorate this important position. Preserving and strengthening the U.S. dollar’s status as the world’s reserve currency is a key reason that lawmakers should work to stabilize the U.S. debt outlook in the years ahead.
Photo by photoman/Getty Images
Further Reading
Delaying Fiscal Reform is Costly, Annual Treasury Report Warns
The Treasury projects that debt as a percentage of GDP will grow to more than five times the size of the U.S. economy in the next 75 years.
Debt vs. Deficits: What’s the Difference?
The words debt and deficit come up frequently in debates about policy decisions. The two concepts are similar, but are often confused.
How Do Quantitative Easing and Tightening Affect the Federal Budget?
The Federal Reserve plays an important role in stabilizing the country’s economy.