Wondering If the Dollar Will Be A-Changing
February 16, 2026
There has been a proliferation in recent months of articles pondering if the U.S. currency might be going down a path leading to the end of its hegemonic role as the world’s reserve currency without equal, a function that bestows many unique beneficial advantages on the U.S. economy. These examinations are married to forecasts that warn of a significant dollar sell-off at some indeterminate time in the future. The onset of a rupture in seemingly unsustainable financial market circumstances often is delayed longer than had been imagined. Then once unraveling begins, the situation often deteriorates astonishingly fast. So what are investors to do?
For starters, it’s important to realize that while a fundamental loss of the dollar’s reserve currency status would inevitably be accompanied by substantial depreciation in its value against other currencies, the U.S. currency has in the post-WWII era experienced periods of very extensive depreciation that did not impair its hegemony. There are two lenses through which to judge the dollar’s status, and it’s best to think of them separately. The first involves its relationship to the international monetary system. A reserve currency, especially for a money whose appeal and usage far outdistances other currencies that have some reserve properties, must check off several boxes. The host country needs to have financial markets that have great depth as well as breadth in which huge transactions can be made without affecting prices. The host economy must be backed by a trustworthy legal system inspiring confidence that conflicts and routine business will abide by predictable and known rules with non-politicized legal institutions. The host country needs a proven record of strength from both an economic and military standpoint. Strength in those respects is needed to engender confidence that the system can withstand both geopolitical and economic shocks. A reserve currency must be grounded in the widespread confidence of the international community, not just the host country. The fairness of elections and violence-free transition of power from one team of government to another must stand above suspicion. Being a healthy reserve currency also goes hand-in-hand with having a minimum of constricting regulations on capital flows and currency exchanges. For 80 years after the end of the second world war, the U.S. dollar stood far above all other currencies in meeting this lengthy yet incomplete collection of attributes required of a reserve currency.
The second vantage point for judging a reserve currency is by simply looking at how it performs against other widely traded monies. Like business cycles, this criterion varies from time to time. A currency can and does oscillate between periods of appreciation and depreciation even if it maintains the aforementioned attributes of an ideal reserve currency. Economic and market fundamentals that come to bear on a currency inevitably wax and wane because different economies do not move in perfect sync. A linchpin of the international monetary system established shortly after the end of the second world war involved fixed exchange rates between the dollar and other currencies that central banks were obligated to maintain except for marginal variation around the central parities. The war had greatly damaged political institutions and the infrastructures of Asia and Europe but not North America, and the matrix of exchange rates reflected those times. The Deutsche mark, Swiss franc, and Japanese yen were valued at approximately 4.0 per dollar, 4.3 per dollar and 360 per dollar.
With the help of America’s Marshall Plan, war-ravished economies recovered beyond their pre-war situations. A second and even more powerful force applying pressure to the fixed dollar parities came from the acceleration of U.S. inflation, both absolutely and in relation to inflation in other major economies. This process began in the mid-1960’s and proceeded, not in linear fashion but in waves with U.S. inflation cresting and bottoming at higher highs and higher lows. Another disparity was the contrast between U.S. trade deficits and surpluses run by other economies. U.S. inflation eroded the credibility of fixed exchange rates, and that erosion of confidence spawned additional speculative capital transactions that put pressure on the parities. To release pressure, the dollar devalued a first time in December 1971 and a second time in February 1973. Neither quashed speculation of a coming more profound change in the international monetary system, and a floating system of market-determined exchange rates was launched in March 1973.
The early years of floating dollar exchange rates was a wild, wild west environment, and the dollar fell significantly further to as low as DEM 1.7150, 176.45 and and 1.465 Swiss francs per dollar by the end of October 1978. At that point, the dollar had lost 57% against the mark, 51% versus the yen, and 66% relative to the franc compared to their original fixed parities. Substantial swings in the dollar did not end with the restoration of lower U.S. inflation, the establishment of a jointly-used European currency managed by a single central bank committed to low and stable inflation, and Japan’s prolonged experience of price deflation and very slow economic growth. Since the euro launched at the start of 1999, it has ranged as low as $0.8228 in October 2000 and as high as $1.6038 in July 2008, a high/low corridor that is 95% wide. The yen has been as strong as 79.85 per dollar in April 1995 and then 75.7 in October 2011 but touched a 38-year low of 162 in July 2024 and was nearly that weak again at 159.5 in the middle of last month.
The above documentations are living proof of a disconnection between where the dollar goes and the likelihood of an end to its reserve currency hegemony. In fact over time and until recently, the feeling had grown that world economies had become so interdependent and business so globalized that it would be decades at best before the dollar even has to share equal billing with a second reserve currency. The operative phrase here is until recently, and that thinking rested on the fact that the United States and dollar checked off the boxes of what it takes to fit the definition of a reserve currency completely and far better than any other reserve currency wannabes. The other argument was that disentangling global business arrangements to fit a different monetary system would entail an extraordinarily difficult transition.
But as the saying goes, necessity is the mother of invention. The Make America Great Again agenda, inscribed in Project 2025, calls for an across-the-board departure from elements that made the dollar a perfect reserve currency candidate, and one that in practice was quite favorable for the United States and other major democracies around the world. From the vantage point of other countries, dollar hegemony, trade relationships, and geopolitical alliances have all been weaponized in ways that are incentivizing other arrangements.
Sterling offers the best example of what might happen to the dollar if a groundswell toward an alternative monetary system takes hold. It’s no longer such an implausible scenario. The United States represents just 4.3% of the world’s population, and the insular approach to immigration removes the special sauce that put America on track to emerge as the leader of the free world last century. Before the dollar, sterling played the role of currency hegemon. A single British pound cost $5.04 in 1934 and $2.81 as late as 1967. It did not cheapen beyond $2.0 until March 1976 but then plunged quickly to $1.55 in a crisis so severe that the government had to secure a loan from the IMF to stabilize things. In February 1985 the pound got as weak as $1.0345, which translated to a cumulative near five-fold advance over fifty years. Sterling is currently trading at around $1.36, helped by general dollar depreciation over the past year, but that currency has been as weak as $1.26 within the past year. Britain is currently a mess economically: 1.0% year-on-year growth, comparatively high 3.4% CPI inflation, and excessive fiscal debt and deficits. The Labor Party government is very unpopular, and the parties in opposition lack refreshing ideas.
The example of Britain stands out as what may happen to America if the dollar’s claim to currency hegemony crumbles. It’s possible for reserve currencies to depreciate even extensively without losing their reserve currency credibility. The fate of a currency that loses its reserve currency status because of more fundamentally directional changes in that country’s essence is not good. Once the glory is lost, such is not likely to revive.
Copyright 2026, Larry Greenberg. All rights reserved.
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