The year 2026 may not bring a sudden fall of the US dollar. But it could mark the moment when its quiet decline gathers speed. As the US increasingly uses the dollar as a tool of pressure, other countries are working harder to trade and pay without it.
America’s role in global trade has been shrinking for years. In 2000, it accounted for about one-third of world trade. Today, that share is closer to one-quarter. At the same time, emerging economies are trading more among themselves. As these links grow, the dollar becomes less central.
This change is already visible. India and Russia now settle much of their trade in rupees, dirhams, and yuan. China routes more than half of its trade through its own payment system, CIPS, instead of SWIFT. Other country pairs—such as Brazil and Argentina, India and the UAE, Indonesia and Malaysia—are also testing trade in local currencies.
Central banks are responding too. In 1999, the dollar made up about 72 percent of global foreign exchange reserves. Today, it is down to around 58 percent, and the trend is downward. A reserve currency works on trust. And trust depends as much on perception as on facts. That perception is changing.
Domestic problems in the US are adding to the strain. Government deficits are large and still growing, expected to reach nearly $2 trillion in 2025. The current account gap is widening as well. To cover these gaps, the US relies heavily on creating new money. For years, the dollar’s special status absorbed the shock. Now, that cushion looks thinner.
Even US government bonds no longer feel as solid as they once did. There are now more than $27 trillion worth of US Treasuries circulating worldwide. This means more bonds to trade, settle, and hold. But the banks that are meant to provide liquidity have not expanded fast enough. When markets come under stress, there are simply not enough balance sheets to absorb heavy selling—unless the Federal Reserve steps in.
This weakness was exposed in March 2020, when the Treasury market froze during a crisis and needed direct central bank support. It was a rare moment when the world’s safest market failed to function on its own.
Looking ahead to 2026, the biggest risk to the dollar is unlikely to be another currency replacing it. Instead, the threat comes from new payment systems that bypass the dollar altogether. This is especially true in emerging markets, where access to dollar liquidity has often been costly, slow, or political.
Several alternatives are already taking shape. One is mBridge, a project involving central banks from China, Hong Kong, Thailand, and the UAE, supported by the Bank for International Settlements. It aims to allow countries to pay each other instantly using digital versions of their own currencies. Another is BRICS Pay, which would let BRICS and partner countries settle trade and investment directly in their local currencies.
Then there are stablecoins. These digital tokens allow money to move across borders quickly and cheaply, without traditional banks. Most stablecoins today are linked to the US dollar, which actually strengthens its reach. But that may change. If stablecoins tied to multiple currencies—or not tied to the dollar at all—become common, they could offer a neutral way to settle global trade.
China is unlikely to challenge the dollar openly. Instead, it is likely to build around it. Yuan-linked stablecoins may spread through Hong Kong, the Gulf, and Southeast Asia. Some could be backed by commodities like gold or oil. These tools could be used to pay for ports, energy shipments, or infrastructure projects without using dollars or US banks.
Traditionally, it has taken hundred years for one global currency to replace another. But technology is speeding things up. Digital finance, new trade routes, and shifting power balances are shortening the timeline. The dollar is still dominant. But the cracks are clearer than before. And in 2026, the risk of slipping is higher than it has been in a long time.
Receive Daily Updates
Recent Posts
Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.