Losing reserve-currency status would cost the United States roughly $18 trillion, a National Bureau of Economic Research paper estimates. That figure is what economists put on the “exorbitant privilege” the dollar earns simply by being the currency the rest of the world chooses to hold.
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The privilege is not abstract. Foreign central banks, investors, and institutions hold US Treasury bonds and other dollar assets for more than the return: those assets are safe, liquid, and useful as collateral. That demand works like a fee, or seigniorage, that the rest of the world pays for access to dollar liquidity.
How the privilege shows up in the numbers
By most measures the dollar plays a bigger part in the world economy than the US share of global GDP would suggest. Federal Reserve economists Carol Bertaut, Bastian von Beschwitz, and Stephanie Curcuru found the dollar made up 60% of the world’s disclosed official foreign exchange reserves in 2021. That was down from 71% in 2000, but still far ahead of the euro’s 21%, the yen’s 6%, the pound’s 5%, and the Chinese renminbi’s 2%.
That demand lands squarely on US government debt. At the end of the first quarter of 2021, foreign investors, official and private, held $7.0 trillion of marketable Treasury securities, or 33% of the total outstanding, while domestic private investors held 42% and the Federal Reserve System held 25%. Foreigners also held more than $950 billion in physical dollar banknotes at that point, roughly half of every dollar bill in circulation.
Why central banks anchor their currencies to the dollar
Reserve status feeds a second habit: a country pegging its own currency’s movements to the dollar rather than letting it float freely. Economists Ilzetzki, Reinhart, and Rogoff put 50% of world GDP outside the United States, as of 2015, in countries whose currency was anchored to the dollar, against just 5% anchored to the euro. Even the Chinese renminbi, nominally re-pegged to a basket of currencies, moved less than 2% against the dollar in 90% of the months between January 2016 and April 2021, because the dollar and dollar-anchored currencies made up more than half of that basket.
Trade tells a similar story. Between 1999 and 2019, exporters and importers invoiced 96% of trade in the Americas in dollars, 74% in Asia-Pacific, and 79% everywhere else outside Europe, where the euro dominates instead. About 60% of international bank deposits and loans in foreign currency are denominated in dollars too.
How the meaning of “reserve currency” has shifted
The privilege is not fixed. In remarks published by the Bank of England, Andrew Bailey traced how the term “reserve currency” has changed since the nineteenth-century gold standard, when a reserve meant the gold the Bank of England held to back its promise to convert banknotes on demand. Sterling held the role then, built on the British Empire and the Sterling Area that followed it.
Bretton Woods replaced that system with a joint dollar-gold anchor, which Bailey said drove the growth of official dollar reserves and installed the dollar as the reserve currency in the modern sense. When that system broke down in the early 1970s, countries moved to free-floating exchange rates and domestic inflation targets, and reserves took on a new job: a buffer against pressure from capital flows, the role reserves played in the Asian financial crisis of the late 1990s.
Bailey put numbers on that shift. The stock of foreign exchange reserves relative to global GDP grew from 3% to 11% between 1976 and last year, and the dollar’s own share of foreign currency reserves fell from 80% to 57% over the same stretch, even as its lead over every rival currency held.
What losing the privilege would actually cost
The NBER paper, by Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig, and Robert J. Richmond, modelled what would happen if the world stopped treating US assets as a special form of international liquidity. Their baseline calculation: a complete loss of reserve status would produce an 8.8% real depreciation of the dollar and push US real interest rates up by 0.9 percentage points. Depending on how readily consumers would swap US goods for foreign ones, the depreciation estimate ranges from as low as 5.1% to at least 17%.
The interest rate estimate holds steadier across those assumptions, because it turns on bond markets rather than goods markets. Losing reserve status would force domestic investors to absorb dollar bonds worth around half of US GDP that foreigners currently hold, and that reabsorption alone would need roughly 90 basis points of extra yield to find buyers.
None of this is a hypothetical run for its own sake. The paper’s authors point to movement already under way. Since 2022, investors have paid a smaller premium to hold Treasuries rather than comparable foreign government bonds. Foreign ownership of US public debt has slipped from roughly 45% to 30% over the past two decades, even as foreign holdings of private dollar assets have stayed steady.
