Why is the 'distance from the dollar' happening? Is the dollar losing its dominance?
The US dollar is the world's major currency and the most widely used currency for trade and other international transactions. However, demand for the dollar from countries and corporations has been declining in recent years, and JP Morgan explains why.
De-dollarization: The end of dollar dominance? | JP Morgan
'Simply put, dedollarization refers to a significant decline in the use of the dollar in global trade and financial transactions, resulting in a decline in demand for the U.S. dollar by countries, institutions and corporations,' JPMorgan said, adding that it refers to the dollar's weakening dominance in foreign exchange and commodity trading, the denomination of debt, and its share of central bank reserves.
There are two main factors that could undermine the dollar's status. The first is adverse developments that undermine the perception of the dollar's safety and stability, specifically events that threaten the United States' status as one of the world's leading economic, political, and military powers. For example, the growing polarization in the United States that threatens to undermine its 'safe haven' status, and U.S. tariff policies that could undermine investor confidence.
The second factor is positive developments outside the US that increase the credibility of alternative currencies, such as economic and political reforms in China. Over the past 30 years, the US share of global exports and production has declined, while China's has grown significantly.
Nevertheless, the dollar's dominance remains evident in foreign exchange transaction volumes, trade, cross-border debt denominated currency, and foreign currency debt issuance. According to
Meanwhile, central banks' foreign exchange reserves have been moving away from the dollar, with its share falling to its lowest level in 20 years. However, the dollar's share of foreign exchange reserves was even lower in the early 1990s, so 'this is not entirely abnormal,' says Meera Chandon, co-head of global foreign exchange strategy at JPMorgan. While much of the reallocation of foreign exchange reserves has been toward the yuan and other currencies, the dollar and euro remain at a high level. While the yuan has grown, it remains very small, she says.
The primary driver of the dedollarization of foreign exchange reserves is growing demand for gold. Gold, a popular alternative to fiat currencies, has seen its share of foreign exchange reserves increase, primarily among emerging market central banks. Over the past decade, China, Russia, and Turkey have been the largest buyers. Overall, while emerging market reserves still hold a low 9% of gold, this figure has more than doubled from 4% a decade ago, and developed markets hold an even higher share at 20%. This increased demand is partially driving the rise in gold prices, which are projected to rise toward $4,000 per ounce by mid-2026.
Even in developed country government bond markets, the relative attractiveness of U.S. Treasuries has declined, and while foreign investors remain the largest component of the U.S. Treasury market, their holdings have fallen to 30% as of early 2025 from a peak of over 50% during the global financial crisis.
Jay Barry, head of global rates strategy at JPMorgan, said: 'International demand has not kept pace with growth in the government bond market for over a decade, but we need to consider what more aggressive action could mean. Japan is the largest foreign creditor, accounting for about 4% of the total market, so any large sell-off by countries other than the US would have a big impact.'
The shift away from the dollar is most pronounced in commodity markets. The dollar's influence in pricing is declining, and a large proportion of energy and other commodities are now set in non-dollar-denominated contracts, and this proportion is on the rise. For example, due to Western sanctions, petroleum products exported by Russia are sold in the buyer's local currency or in the currencies of countries Russia considers friendly. On the buyer side, India, China, and Turkey are all exploring alternatives to the dollar, and Saudi Arabia is also considering adding yuan-denominated futures contracts to its pricing model for domestically produced crude oil.
In addition to oil, Yuan has also strengthened its dominance in coal and nuclear power, which is said to have reduced the need for precautionary stockpiles of dollars, U.S. Treasury bonds, and oil.
Meanwhile, dollarization of deposits—the phenomenon in which the majority of bank deposits are recorded in dollars rather than the country's own currency—remains significant in many emerging markets. Dollar-denominated deposits in emerging markets have grown almost continuously over the past decade, with Latin America being the most dollarized region. China is an exception, having seen a sustained decline in dollarization since 2017. This is likely due to the worsening of U.S.-China relations.
Alexander Wise, head of long-term strategist at JPMorgan, said: 'A reserve currency must be perceived as safe and stable, and provide a sufficient source of liquidity to meet growing global demand. A move away from the dollar could shift the balance of power among nations, which in turn could restructure the global economy and markets. The impact would be felt most acutely in the US, as a move away from the dollar is likely to lead to a widespread depreciation of US financial assets and an underperformance relative to other regions. For equities, absolute and relative returns would be negatively affected by divestment and reallocation from US markets and a severe decline in confidence. Additionally, upward pressure on real yields is likely as investors sell off some of their US bonds or diversify and reduce their international reserve assets.'
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