For years, de-dollarization has been discussed as though a monetary revolution was under way, with the BRICS nations challenging the US dollar. Recent BRICS and SCO deliberations, however, suggest a considerably more cautious and calibrated approach, with emphasis on local-currency settlement, cross-border payment mechanisms, and interoperability between national payment systems. Clearly, the objective is less about replacing the dollar than to reduce dependence on it.
If replacing the dollar is no longer the immediate objective, what does de-dollarization actually mean? More importantly, how far can countries realistically reduce their dependence on a currency so deeply embedded in global trade and finance?
The answer to this lies in understanding how and why the dollar became dominant in the first place. The dollar’s rise was initially rooted in America’s extraordinary economic and financial position after the Second World War. The United States had accumulated a large portion of the world’s monetary gold, while much of Europe had been devastated by the war. Bretton Woods then placed the dollar at the center of the post-war monetary order, making the dollar convertible into gold and other linked currencies. When President Richard Nixon ended dollar convertibility into gold in 1971, the dollar did not lose its premier global status. By then, an extensive financial architecture had already developed around it. The United States possessed the world’s largest advanced economy, deep financial markets, a highly liquid government bond market, and strong institutions. The dollar became the currency in which international trade was invoiced, banks conducted cross-border transactions, companies borrowed, and investors accumulated assets. US Treasury securities provided central banks with a huge pool of liquid reserve assets. Over the years, the system became so self-reinforcing that the more the world used dollars, the deeper dollar markets became.
Today, the world is therefore not merely using a currency, but an entire financial ecosystem, which makes even a partial de-dollarization challenging. The first hurdle is reducing the dollar in bilateral trade. India can settle some trade with Russia in rupees and roubles. China can also trade partly with its partners in renminbi. Countries can bypass the dollar by establishing currency-swap arrangements. But this works much better among countries with relatively complementary trade flows than it does as a universal system. Consider a simple problem. If India imports substantially more from a country than it exports to it, that country will accumulate rupees. Unless it has sufficient Indian goods or assets to purchase, it may not want to hold unlimited rupee balances. The dollar, by contrast, can be used virtually everywhere because it is already an international store of value and medium of exchange.
The second challenge is what will replace US Treasuries? This is perhaps the biggest obstacle to reserve diversification. A central bank holding foreign-exchange reserves is not just looking for a currency, but safe and liquid assets to invest. The US Treasury market is enormous, highly liquid and supported by the world’s largest reserve currency and is therefore hard to replicate. Neither the German Bunds or Japanese government bonds, British gilts or other sovereign securities or even gold holdings provide the same combination of scale, liquidity, safety, convertibility and global acceptance as US Treasuries. The euro comes closest, but the euro area has multiple sovereign issuers as compared to a single unified US Treasury. The renminbi faces greater limitations because China’s capital account remains relatively restricted and its financial markets are not as open to foreign investors.
The third impediment is the dollar’s reserve-currency function. Its role as a reserve currency is even harder to dislodge because reserve currencies benefit from powerful network effects. Central banks hold dollars partly because other central banks do so. Banks hold dollar liquidity because their customers need it. Companies invoice in dollars because their suppliers and customers use dollars. Investors buy dollar assets because the markets are deep and liquid. Breaking this circular effect requires much more than creating another payment mechanism. No alternative currency currently performs all three functions at comparable global scale.
Recent figures by the IMF demonstrate the gap. In the first quarter of 2026, the dollar accounted for 57.13% of disclosed global foreign-exchange reserves, compared with 20.03% for the euro and just 1.99% for the Chinese renminbi.
Countries therefore want to reduce dollar dependence to overcome vulnerabilities. The first is geopolitical. US sanctions can restrict access to the dollar-centered financial system. The freezing of a large portion of Russia’s foreign-exchange reserves after the invasion of Ukraine demonstrated that foreign reserves are not entirely politically neutral assets. The second is monetary. Countries heavily dependent on dollar financing are exposed to US interest-rate decisions even though they have no role in determining Federal Reserve policy. The third is strategic. Countries increasingly want the ability to conduct international transactions even when relations with Washington deteriorate.
Hence countries want options without abandoning the dollar. India, the European Union and China illustrate this clearly. India can increase rupee-based trade and diversify its reserves into euros, gold and other assets. But it still needs substantial dollar liquidity for external payments, commodities and foreign-exchange management. As of 4 September 2026, India’s foreign currency reserves were about $785.7 billion, of which foreign currency assets totaled $648.2 billion, gold: $113.8 billion, SDRs: $18.8 billion and IMF reserve position: $4.9 billion. Although the RBI does not disclose the precise currency composition of its foreign-currency reserves, the dollar remains central to reserve management because of the depth and liquidity of dollar markets and the availability of US Treasury securities.
The EU possesses the euro, itself a major reserve currency, but European banks and companies remain deeply integrated into dollar funding and financial markets. At the end of 2025, the European Central Bank (ECB) estimated that 78% of its foreign-currency holdings were in US dollars.
As one of the most vocal advocates of reducing dollar dependency, China has perhaps the strongest incentive to reduce dollar dependence. It has promoted renminbi settlement, bilateral currency arrangements, alternative payment mechanisms, and gold accumulation. Yet ironically, according to the ECB, China holds 55% of its US$ 3.4 trillion foreign exchange reserves in dollars.
Only Russia appears to made genuine strides away from the dollar. According to its central bank, out of its total international reserves of about $630 billion in 2022, half of it was held in Euros and $132 billion in gold.
The paradox cannot be more striking. Countries want less dependence on the dollar precisely because they recognize how difficult it is to do without it, which explains the realistic path towards gradual diversification. But each step encounters a structural limitation. Local currencies cannot overnight replicate the dollar’s universal acceptance. Alternative sovereign bonds cannot match the scale and liquidity of the US Treasury market. Alternative currencies cannot instantly acquire the network effects that the dollar has over decades.
This makes de-dollarisation a long-drawn process. Its future trajectory will depend on several variables like the evolution of global trade, geopolitical alignments, financial reforms undertaken by challenger economies, willingness of countries to open their capital markets, and most importantly, the future economic and institutional strength of the United States itself. The dollar’s dominance may not last forever. For now, the likely outcome is neither the end of dollar dominance nor a continued dependence on it. It is a gradual expansion of options emerging around the greenback.
