Is the status of the US dollar as a reserve currency shaking, and is history repeating itself?

Note that the views put forward by Ray Dalio, the founder of Bridgewater, in his book "Principles: Dealing with the Changing World Order" have aroused wide attention. Many indicators mentioned in the book, whether the author emphasizes them or not, are worth exploring in depth. Although some of the conclusions still need to be debated, the discussion on the change of reserve currency undoubtedly reveals important and real underlying logic. First and foremost, it is important to note that throughout history, there has always been a currency widely accepted as the "reserve currency," becoming the main medium for international trade and settlement. Over the past five to seven hundred years, various currencies have played this role, and ultimately they have all entered similar cycles of decline. The last one to complete its cycle was the British pound. Currently, many analysts believe that the US dollar may be going through a similar evolutionary process. A key leading indicator is usually the level of debt. As of March 2026, the size of US national debt is approaching $40 trillion. According to Treasury Department data, the daily increase is about $7 billion. Such a high leverage ratio has pushed the US debt-to-GDP ratio to over 135%, equivalent to countries like Italy, Japan, about twice that of Germany. About $7.3 trillion is held by foreign countries, with Japan and the UK being major creditors. Interest payments on the national debt have become the third largest expense for the US federal government, exceeding Medicare. This logic is similar to that of a company burdened with heavy debt. A country, to some extent, is like a company, and the continual rise in debt inevitably leads to escalating interest payments, which not only inhibits economic growth and weakens government capacity to respond, but also significantly increases the risk of financial crises. Currently, the annual interest cost of US debt exceeds its entire annual defense budget. This obviously squeezes valuable capital that could be used for public investment. There are precedents of debt crises spiraling, with defaults in Greece, Latin America, and Sri Lanka serving as clear evidence. Latin America is particularly typical, as its excessive borrowing in the 1970s directly led to the "lost decade" of the 1980s. Ironically, the region was considered an attractive emerging market before 1980. The debt crisis, although the result of multiple factors, was undoubtedly one of the main culprits for its subsequent difficulties. This raises a key question: how do investors determine the warning line for debt? There is no universally applicable "safe threshold" for a country's debt level in the international community. Although guidelines like the EU's Maastricht Treaty debt-to-GDP ratio of 60% exist, even member countries frequently exceed it. Developed countries like the US and Japan often exceed debt ratios of 100%-200% and still operate, while many emerging market countries with debt ratios below 50% are viewed as high risk or even defaulters. Therefore, it is almost impossible to objectively determine the debt tolerance limit the market can bear before a crisis erupts. This largely depends on investor confidence rather than mathematical calculations, and a large amount of debt risk is hidden. This threshold is like Schrdinger's cat; its existence is only confirmed once it is crossed and a crisis is triggered. History shows that when a reserve currency collapses, it often triggers a global financial crisis. Severe inflation, trade stagnation, and loss of policy influence are typical consequences. In the digital age where the collapse of a reserve currency has never been experienced, its specific form and market reaction remain unknown. Typically, the average lifespan of a reserve currency is about 80 to 100 years. Since the establishment of the US dollar's position in the Bretton Woods system in 1944, it has been maintained for over 80 years. The more important question is, what signs indicate that this process is underway? De-dollarization: Ubiquitous Signs Some views suggest that current US government policies are accelerating the de-dollarization process. Policies like "America First," dollar-based sanctions and tariffs, intended to maintain dollar hegemony, may actually have the opposite effect. Political pressures on the Federal Reserve weaken market confidence in the US dollar's policy independence and stability as the world's reserve currency. Broad sanctions are accelerating the pace of reducing dependence on the dollar in countries like the BRICS, while also promoting the shift to alternative currencies like the euro. Observing the bond market, the issuance of euro-denominated bonds has significantly increased, showing strong growth in 2025-2026, while the US dollar has not experienced a corresponding rise. By mid-2025, the global central banks' share of US dollar reserves had fallen to its lowest level in over thirty years. The share of US dollar reserves held by foreign banks is currently below 56.5%, the lowest level since 1995. Another key signal is the changing correlation between the dollar and market volatility: in the past, during market turmoil, the dollar often strengthened due to its safe-haven characteristics, but this pattern has quietly changed. It is premature to assert that the dollar will "collapse." The change in currency value depends on the relative strength of demand in the market, rather than simple ups and downs. This evolutionary process may last for 10 to 20 years, rather than just a few years. However, it can be observed that the US dollar index is currently experiencing its weakest start since 1973. Unlike in the past, it may be difficult for the US dollar to rebound strongly after this weakening cycle, for four reasons: 1. Unsustainable public debt Compared to debt ratios of about 35% of GDP in 1973 and below 70% in 1995, the current US debt ratio exceeding 130% puts the country in a dilemma: if the Federal Reserve maintains high interest rates, it will exacerbate interest burden, while lowering rates may weaken the attractiveness of the dollar and help drive inflation. Debt reduction is imperative, but whether it is cutting spending on Medicare, Social Security, and national defense, or increasing taxes (such as introducing a value-added tax, corporate sales consumption tax, or raising capital gains tax), it faces huge political resistance and conventional tools may be ineffective. 2. Weakening of the Fed's Independence Compared to the respected independence of the Federal Reserve during the Volcker and Greenspan eras, today's Federal Reserve faces more political pressure. The government's inclination towards a weak dollar to boost competitiveness contradicts the policy of a "strong dollar" in the 1990s and will erode the international reputation of the dollar in the long run. 3. Maturity of alternative currency systems The rise of alternative assets such as gold, cryptocurrencies, as well as currencies like the yuan and euro in a multipolar world is eroding the traditional advantages of the US dollar financial system. During times of crisis, the automatic boost in demand for the dollar is weakening. 4. Narrowing and reversal of interest rate advantage In the past, the US higher interest rates attracted global capital. Now, many central banks offer competitive rates, and the possibility of the Fed cutting rates under political pressure is greater than raising them, as raising rates would further increase the burden of debt interest. This parallels the logic of a company facing debt distress. Fundamental differences and potential consequences The current situation is fundamentally different from historical periods: high debt levels, a global "dumping of the dollar" sentiment, and disintegration of traditional allies. Statements and actions regarding the value of NATO, unilateral actions, tearing up agreements, and interruptions in intelligence sharing have prompted several European countries to openly question their alliance with the US, and even to set barriers in military cooperation and airspace access. This situation was unimaginable just a few years ago. Aside from the socio-political implications, what does this mean for the dollar? Protectionist and isolationist policies, which seem to safeguard US interests, are actually damaging the dollar's reserve currency status and accelerating its dangerous downward trajectory by triggering inflation, inviting trade retaliation, and reducing global demand for the dollar. Historical lessons show that ignoring debt issues and weaponizing currency will lead to decline. The decline of the pound, including the eventual collapse of its "sterling area," serves as a cautionary tale. In the worst-case scenario, it may not only be dollar depreciation, but rapid devaluation (exceeding 15%) due to simultaneous selling by major holders in the short term. This could end the dollar's purchasing power advantage and lead to a 15-30% or even larger drop in US stocks (such as the S&P 500 index). Even in an optimistic scenario where the dollar's reserve status is maintained, it will still be weakened, and this process is being influenced by current policy direction. Investors' strategy for dealing with this This does not mean that one should completely exit the US market. The key is to remain vigilant and actively seek diversification. Specifically, one can take the following measures: significantly reduce the concentration of US dollar assets, increase holdings of euro, pound, yen, Canadian dollar, and other major currency assets; establish multi-currency accounts for true global asset allocation. This not only helps capture opportunities beyond mainstream markets, but also effectively hedges against shocks from a single economy. In conclusion, the challenges facing the dollar are structural and multifaceted. Investors need to face the patterns shown in historical cycles, adjust their expectations and allocations based on real data, and build more resilient investment portfolios in a complex environment.