Is the dollar this era’s denarius? The greenback’s dominance seems in terminal decline

But much of the cost will be borne by the US itself. The immediate effects are visible: a sharp rise in gas prices, inflation climbing to a two-year high and growing concerns that, as consumers cut back on spending to offset higher costs, unemployment will rise.

While these short-term shocks are serious, a major risk that has received less attention is that the dollar could lose its status as the world’s primary trade and reserve currency.

The decline of a reserve currency is a slow process. The British pound ceded its dominance to the US dollar over roughly two decades, beginning in the 1920s. As Barry Eichengreen has noted, the Roman denarius—arguably the world’s first international currency—also unravelled over a long period, starting when Emperor Nero debased it in the first century CE.

Any international currency ultimately depends on trust. I witnessed this during my time as chief economic advisor to the Indian government under prime minister Manmohan Singh.

On 5 August 2011, Standard and Poor’s downgraded the US long-term credit rating from AAA to AA+, fuelling fears of immediate capital flight. Instead, the opposite happened: money flowed into the US economy. In the face of global turbulence, investors trusted that the US would honour its obligations, no matter the cost.

That trust, a cornerstone of soft power, is rapidly eroding. Samantha Power, the former administrator of the US Agency for International Development (USAID), highlighted this in a recent lecture at Cornell University, where she criticized the Trump administration’s decision to dismantle the agency.

The abrupt and “heartless” manner in which it was shut down, she said, halted humanitarian aid without warning, leading to immense suffering among populations around the world that had depended on its continuity.

The closure of USAID, alongside Trump’s military adventures in Iran and Venezuela and relentless verbal attacks on long-standing allies like Canada and Denmark, has cast a shadow over America’s global standing and trustworthiness.

This, in turn, puts the dollar’s hegemonic status at risk.

To understand the potential cost, consider seigniorage: because the US dollar is globally trusted, the [country’s central bank], its Federal Reserve, can print a $10 bill for less than seven cents, and it will be accepted at full value around the world. As empires from Rome to Britain have shown, issuing the world’s leading currency allows a country to create value almost out of thin air. Losing that capacity would slow economic growth.

Unless American policy reverses course, this year may go down in history as the moment the American dollar began to lose its status as the world’s currency.

The author is a professor of economics at Cornell University and a former chief economic advisor to the Government of India.