Transition of finance

Cooperative efforts are required to build a diverse and stable international monetary system

In 1971, former US president Richard Nixon closed the gold window, effectively ending the Bretton Woods system and absolving the United States of its obligation to convert dollars into gold at a fixed rate. This marked a pivotal shift in the global monetary landscape. That same year, former US treasury secretary John Connally's famous remark, "The dollar is our currency, but your problem", reflected Washington's confidence in the dollar's dominant position, despite long-standing criticisms from Europeans.

The early 1970s saw the first major test of the dollar's dominance with the onset of floating exchange rates, which introduced significant uncertainties. However, the dollar retained its supremacy, bolstered by strong network externalities and the US military and political influence.

Today, the dollar accounts for 57 percent of official foreign exchange reserves, down from 70 percent more than two decades ago, albeit at a gradual pace. The dollar still dominates the global foreign exchange market, as it is involved in 89 percent of transactions (on "net-net" basis) and holds a 51 percent share of the global payment system. It also remains preeminent in international banking loans and debt securities markets.

However, the dollar system faces mounting challenges. The US debt crisis undermines the dollar's status as a safe asset, and policies such as the US administration's "America First" have further shaken its credibility. The "triple whammy" of falling US Treasury bonds, stock markets and the dollar index in early April 2025 highlighted the vulnerabilities of the dollar's safe asset status. Increasing geopolitical risks and trade fragmentation further signal the unsustainability of the dollar's dominance, prompting a shift toward diversification.

First, non-dollar currencies are gaining significance in the international reserve system. The euro, as the second-largest international currency, is seeing increased calls for developing euro-denominated sovereign bonds, especially as rising defense expenditures boost the euro financing market. This could challenge the long-standing inertia that there is "no alternative to the dollar".

Non-traditional reserve currencies such as the Australian dollar and the Canadian dollar are also rising, while the renminbi is gaining ground, particularly in trade finance. The recent preference for gold underscores the confidence crisis facing the dollar system.

Second, geoeconomic factors are influencing currency networks. The fragmentation and restructuring of trade relations are creating new opportunities for currency choice, potentially shifting third-party currency pricing to local-currency settlement.

Third, in the payment system, low-cost transactions will no longer be the dollar's exclusive domain. New payment platforms and regional payment systems are increasing network choices, and the rapid development of digital currencies is transforming the payment ecosystem.

The transition period for the international monetary system is fraught with potential crises and disruptive currency competition, threatening global economic and financial stability. As the US retreats from multilateral systems, a leadership vacuum is emerging in the international monetary system, raising the specter of the Kindleberger Trap — the risk that the existing world power lacks the ability, while the ascendant power lacks the will, to provide the world with vital public goods, such as a stable anchor for the international monetary system.

In the 1930s, the collapse of the gold standard and power transitions between the United Kingdom and the US led to monetary chaos, attributed by Charles Kindleberger to a lack of international leadership. Joseph Nye later used the Kindleberger Trap in 2017 to discuss US-China power dynamics.

Currently, the Federal Reserve acts as the global lender of last resort. Despite its policies being US-centric, the Fed plays a crucial stabilizing role during crises. Its actions in providing liquidity and initiating dollar swap lines are vital tools for mitigating liquidity crunches and stabilizing markets.

Today's international monetary system shows similar danger signs. While the Fed maintains its leadership in providing global financial stability, its future willingness is uncertain. In January 2026, 10 national monetary authorities, including the European Central Bank, and the Bank for International Settlements issued a statement supporting the Fed, emphasizing central bank independence as a cornerstone of price, financial and economic stability. This reflects global concerns about financial stability. The Fed's absence would destabilize the dollar system.

Avoiding international monetary chaos requires enhanced cooperation and more countries providing global financial stability as a public good. Central banks need to take joint action, which remains a viable option for maintaining financial stability despite its challenges. Since 2008, the People's Bank of China has signed over 40 bilateral currency swap agreements, which enable it to play a larger role in supporting global financial stability.

Moreover, international financial cooperation should strengthen the Global Financial Safety Net, a multi-layered network of international financial institutions, regional financial arrangements and central bank currency swaps, so as to maintain global financial stability during turbulent times.

In conclusion, the international monetary system is at a crossroads, with opportunities and risks unfolding at the same time. Embracing change and fostering cooperation to build a diverse and stable international monetary system is the direction for the years ahead.

The author is the director of the Research Center for International Finance at the Institute of World Economics and Politics, the Chinese Academy of Social Sciences.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.