The Dollar's Quiet Retreat

The dollar is not collapsing. It is losing exclusivity. Across the Global South in 2026, reserves remain anchored to the dollar, but parallel settlement arrangements increasingly shape how trade is conducted. The timing matters. The shift accelerates not because alternatives suddenly improved, but because the cost of single currency dependence rose sharply after 2022. Higher US rates, more frequent sanctions, and tighter correspondent banking rules turned dollar dependence into a source of volatility for countries already absorbing climate, debt, and trade shocks.

The latest data from the International Monetary Fund's Currency Composition of Official Foreign Exchange Reserves survey shows the US dollar comprised 56.92 percent of global currency reserves in the third quarter of 2025, down from 57.79 percent in the first quarter. Since the beginning of the century, the dollar's share of central bank reserves has fallen by approximately 14 percentage points, from 71 percent in 1999 to 57.3 percent in 2024, according to IMF COFER data. Yet this erosion is gradual, not sudden. It reflects steady diversification at the margin rather than wholesale abandonment.

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Reserves Rebalanced, Carefully

Reserve diversification has been steady, not dramatic. The US dollar comprised 58 percent of disclosed global official foreign reserves in 2024 and far surpassed all other currencies including the euro at 20 percent, Japanese yen at 6 percent, British pound at 5 percent, and the Chinese renminbi at 2 percent, according to the Federal Reserve's analysis. The dollar share has declined from its peak of 72 percent of reserves in 2001, as foreign reserve managers have added to their portfolios a wide range of smaller currencies, including the Australian and Canadian dollars.

Crucially, IMF analysis shows that exchange rate valuation effects explain much of the recent volatility. In the second quarter of 2025, the raw data suggested the dollar's share dropped to 56.32 percent from 57.79 percent in Q1, a decline of 1.47 percentage points. However, when adjusted for constant exchange rates, the share would have fallen only slightly to 57.67 percent. Currency movements explained 92 percent of the reduction during the three months through June, according to the IMF.

The decline in the dollar's dominance has not worked in favor of sterling, the yen, or the euro despite the latter's rise in its first decade of existence. Instead, non-traditional reserve currencies including the Australian dollar, Canadian dollar, Swiss franc, and others, including the renminbi, have benefited, according to Policy Center for the New South analysis. The Federal Reserve notes that the dollar share is basically unchanged since 2022, when it accounted for 58 percent of reserves, suggesting that US sanctions on Russia following the invasion of Ukraine have not led to fears of dollar weaponization causing a notable reallocation of reserves out of dollars.

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Payment Rails Multiply

As of May 31, 2025, the People's Bank of China has signed bilateral local currency swap agreements with the central banks or monetary authorities of 32 countries and regions. The outstanding balance of RMB drawn by overseas central banks or monetary authorities stands at RMB 81.8 billion, according to PBoC data. China has increasingly expanded its network of swap lines, with agreements concluded with more than 40 other central banks when including multilateral initiatives such as the Chiang Mai Initiative and the BRICS Contingent Reserve Arrangement, according to Council on Foreign Relations tracking.

The infrastructure of money is diversifying faster than the money itself. China's Cross-Border Interbank Payment System, launched in 2015, allows banks worldwide to clear and settle payments in RMB. By 2024, CIPS had 168 direct participant banks and 1,683 indirect participants across 119 countries, a 20 percent increase in participants from the year prior, according to data compiled by the Atlantic Council Scowcroft Center. CIPS cleared $24 trillion in total transaction volume in 2024, a 43 percent increase from 2023. While still much smaller than SWIFT/CHIPS, which handles about $1.8 trillion per day in dollar payments, CIPS's rapid growth underscores its rising importance.

Unlike swap lines signed by the Federal Reserve, the majority of swap agreements signed by the PBoC with other central banks are not a reaction to an emergency situation. Rather, they are long-term policies aimed at internationalizing RMB. Through these swap lines, partner economies are able to obtain RMB and settle directly in bilateral trade, without the need to use US dollars to complete transactions, according to academic research on China's bilateral swap lines.

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Settlement, Not Symbolism

The most visible changes are mechanical. Exporters invoice a portion of trade in local currencies, importers settle bilaterally, and central banks expand swap and clearing arrangements that reduce immediate reliance on dollar liquidity. Across Asia, Africa, and the Indian Ocean, the pattern repeats. Energy trade is settled partly in local currencies. Agricultural imports increasingly use bilateral clearing. Regional trade banks intermediate transactions that previously ran through New York or London.

Trade between China and sanctions-hit Russia is now overwhelmingly conducted in local currencies. By 2024, more than 95 percent of transactions were settled in yuan and rubles, and China-Russia trade reached a record $237 billion, a 3 percent growth year-on-year. Over 40 percent of daily FX trading volume on the Moscow Exchange is now in yuan, surpassing the USD's share, and by late 2023, Russian banks held more yuan at $68.7 billion than USD at $64.7 billion in deposits.

Other BRICS members are also exploring greater RMB use. Brazil signed a pact in 2023 to settle China trade in yuan and reais, establishing a yuan clearing bank in Brazil, and Indian refiners have used yuan for Russian oil purchases. Leaders openly endorsed using non-dollar currencies for trade at the 2025 BRICS+ summit. In September 2021, the Local Currency Settlement cooperation mechanism between China and Indonesia was launched. Meanwhile, at a meeting of the Association of Southeast Asian Nations in May 2025, in Indonesia, members agreed to develop a framework for the settlement of external transactions in their local currencies.

In May 2025, the People's Bank of China called on major banks to increase the share of yuan in international trade transactions to 40 percent from the current 25 percent. China is also expanding the international use of its UnionPay payment system, whose network of agreements covers more than 30 countries. Using UnionPay payments via QR codes in Southeast Asian countries is boosting transactions by tourists and small businesses, reducing reliance on the dollar.

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Risk Is Repriced, Not Removed

Local currency settlement reduces exposure to dollar funding shocks but introduces other risks, including exchange rate volatility on firms and weaker hedging markets. For the Global South, this matters more than reserve composition. Payments are where volatility is felt first. A reliable rail stabilizes trade even when capital flows hesitate. Yet reliability depends on credibility. Settlement flexibility buys time, not immunity.

De-dollarization does not insulate countries from weak fundamentals. It reduces the speed and severity with which external shocks transmit into domestic crises, but it cannot substitute for sound policy frameworks. Countries that pair parallel rails with credible fiscal rules and independent central banks gain resilience. Those that use them to postpone adjustment merely change the channel through which stress arrives.

As trade becomes more regional, currency usage follows. Local currency settlement grows where trade is balanced and supply chains are dense, and stalls where deficits persist and hard currency remains the constraint. The geography of trade determines the viability of local currency settlement far more than policy declarations. Bilateral arrangements work best when flows are roughly balanced. Persistent deficits require hard currency regardless of political preference.

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The Dollar Still Dominates

Despite gradual erosion of its reserve share, the US dollar's dominance remains strong in terms of exchange reserves, trade, and foreign exchange transactions, according to the Atlantic Council's GeoEconomics Center Dollar Dominance Monitor. The US dollar share of global foreign exchange reserves stands at 58 percent, the share of export invoicing at 54 percent, and the share of foreign exchange transactions at 88 percent.

Central banks prioritize liquidity, market depth, and operational reliability in reserve assets. The US dollar remains dominant because of deep markets, wide acceptance, and established infrastructure—factors that are not immediately displaced by short-term FX volatility. Any durable shift away from the dollar would likely require coordinated policy changes, alternative deep and liquid markets, or material changes in geopolitical or monetary dynamics.

The dollar is not collapsing. It is receding from total dominance to predominance. The shift is incremental, pragmatic, and corridor specific. Parallel settlement systems expand where they reduce costs and volatility. Reserve managers diversify at the margin into currencies that offer liquidity without full dollar dependence. Payment infrastructure multiplies to reduce reliance on correspondent banking networks that can be slow, expensive, or politically sensitive.

The retreat is quiet because it is pragmatic, advancing corridor by corridor, contract by contract, until dependency fades not through rebellion but through use. By 2026, the dollar remains the anchor currency for global reserves and the dominant medium for international trade. Yet its exclusivity is gone. Alternatives exist. Parallel rails function. Local currencies settle trade. The shift is not dramatic. It is structural.