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Last week’s Weekly Wrap insight on long-term United States (US) Treasuries produced a run of questions that all asked the same thing: if American debt is this high and the dollar’s value is falling, is the dollar going to lose its status as the primary global reserve currency?
The dollar dominates reserves
When looking at the evidence, the data does not support the idea that the dollar will be replaced. The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves dataset has the dollar at 57.13% of allocated reserves in the first quarter of 2026, up from 56.42% in the fourth quarter of 2025, while the euro slipped to 20.03% and the Chinese renminbi sat at 1.99%. While roughly half of that increase reflects valuation effects rather than active accumulation, the direction still runs against the idea of central banks in retreat, and it does so in a quarter when US fiscal deterioration was the dominant market narrative.
More binding than the reserve share, though, is the liability side, and it is here that the popular version of the argument goes wrong. Most government debt globally is issued in domestic currency, because sovereigns that can borrow in their own money do so; what the dollar dominates is cross-border debt, of which it accounts for roughly $23 trillion, or about half the global total. In addition something close to 55% of international debt securities, 81% of trade finance, just over 50% of interbank SWIFT payments and 89% of all foreign exchange trades had a dollar on one side, confirming the dollar remains embedded in the financial and international debt system rather than merely being held in its savings. The international debt component is important – a borrower whose obligations are written in dollars needs dollars regardless of what it thinks of US fiscal policy, which is why the search for an alternative reserve currency keeps returning empty.
Shallow competition
The world’s second dominant currency, the euro, accounts for only around a fifth of international currency use, and the European Central Bank’s (ECB’s) own June 2026 review described its international role as having grown only moderately while warning that fragmentation in the monetary system is increasing; without continuous common issuance at scale there is no euro-safe asset deep enough to absorb reserve flows – meaning there is no euro-denominated financial asset that exists in a large enough quantity for global central banks to buy and store their foreign currency reserves without disrupting the market.
The renminbi, at 3.10% of SWIFT payment value in July 2026 and 1.99% of reserves, remains constrained by a capital account that Beijing has shown no intention of opening. What is, however, happening is diversification at the edges, with central banks buying gold at roughly 50 tonnes a month since 2022, more trade settling in local currencies and payment infrastructure outside the Western banking network being used.
What must be remembered is that reducing a position from overwhelming to merely dominant is a different exercise from exiting it, and the headlines have not made the distinction.
The dollar’s value is the real issue
After a decade in which the US grew faster and paid better rates than its peers, the dollar became historically expensive, trading close to the strongest levels of the floating era and near 15% above fair value on purchasing power measures. A currency priced that richly does not need a crisis to fall, only for the advantages that boosted it to narrow. The US Dollar Index (DXY), near 99.5, sits around 10% below its January 2025 peak, and no credible analyst carries a collapse as a base case.
Diversification is the best defence
For most investors the question is not whether to hold dollars but how much currency risk to run, which is a hedging decision taken with reference to when the money is needed and in which currency it will be spent.
MARKET MOVES
Bonds
The US 10-year Treasury yield eased to around 4.74% at Thursday’s close, slipping from near one-month highs. Two forces drove the move lower: US Federal Reserve (Fed) Governor, Christopher Waller’s dovish remarks, which cooled expectations of a September rate hike, and a firmer Japanese yen that dragged global yields down with it. Context matters here – the US 10-year yield is still up roughly 15 basis points on the month, so this is a pullback within an elevated-rate regime rather than a trend reversal. With the Fed funds target at 3.50% to 3.75% and the market split on whether the next move is a hike or a hold, the Treasury curve is acutely sensitive to today’s Non-Farm Payrolls data; a hot print could push yields back toward, and potentially through, their recent highs.
The German 10-year Bund yield eased about two basis points to 3.35%, helped by cooling energy prices that tempered the inflation impulse and trimmed expectations for further ECB tightening. The move mirrors the broader global bid for duration on the softer Fed tone. Even so, Bund yields remain some 24 basis points higher on the month, underscoring that European rates, like US and UK rates, are contending with an energy-driven inflation backdrop rather than a disinflationary one. The Bund’s relative calm versus United Kingdom (UK) Gilts reflects the eurozone’s less acute fiscal and inflation pressures.
The 10-year Gilt yield fell around six basis points to 5.16%, recovering from a recent sell-off as Brent retreated modestly from six-week highs and natural gas prices eased on hopes the renewed Iran conflict proves short-lived. Gilts remain the pressure point of the developed market complex because yields are up some 27 basis points on the month, and the market is pricing a Bank of England (BoE) rate hike by year-end and another by early 2027, an outlier stance driven by sticky energy-led inflation and persistent concern over UK fiscal sustainability. Sterling assets remain hostage to that combination, and the Gilt’s elevated absolute level relative to Bunds captures the additional risk premium the market demands of the UK.
Equities
Wall Street closed sharply higher on Thursday, with the S&P 500 up 1.06% to 7,746.52, the Dow gaining 1.2%, and the Nasdaq Composite leading with a 1.3% advance. The rally was broad – all but two S&P sectors rose – and was powered by Waller’s dovish comments dragging yields lower. Beneath the index level the dispersion was notable: cloud-based data storage company, Snowflake, jumped more than 16% on a strong report and upbeat guidance, while technology company, Broadcom, fell around 2.7% as its revenue outlook disappointed despite exceeding market expectations. The S&P now sits within roughly 0.9% of its August record of 7,816.70, leaving the market richly valued and vulnerable to a hawkish payrolls surprise that would reverse the yield relief underpinning this move.
The Euro Stoxx 50 finished essentially flat at around 6,359, down a marginal 0.06% and hovering near one-month lows as investors stayed cautious on the Middle East. The session was a study in offsetting forces: luxury names weighed, with LVMH, Hermès and Richemont all down, while technology stalwarts SAP and Siemens Energy provided modest support. US President, Donald Trump’s suggestion that the Iran conflict would be contained helped oil and yields stabilise after earlier spikes, preventing a deeper decline. European equities are lagging their US and UK peers, caught between elevated energy costs and soft demand signals from the luxury complex.
The UK’s FTSE 100 outperformed, closing up 0.70% at 10,832, leaving it within reach of its July record of 10,991. The advance was commodity-led with precious-metals miners Endeavour Mining and Fresnillo rising 4.8% and 2.9% respectively on the stronger gold price, while firmer commodities and a robust services Purchasing Managers Index added support. The FTSE’s heavy weighting toward miners and energy makes it a relative beneficiary of the current high-commodity backdrop that pressures more growth-oriented indices.
Commodities
Spot gold rebounded almost 2% to roughly $4,470/ounce, recovering from more than three-week lows as Waller’s dovish tone weakened the dollar and lowered rate-hike expectations. For perspective, gold still sits well below its January record of $5,608/ounce, so this is a rebound within a broader consolidation rather than a fresh assault on the highs – but with the metal up roughly a quarter over the past year, the structural bid remains intact.Brent crude held firm at $96.11/barrel, up around 0.6% on the day and up roughly 21% over the past month, propelled by fresh US–Iran strikes that revived supply-disruption fears. The elevated oil price is the key variable complicating markets as it keeps a floor under developed-market bond yields, pressures energy-importing economies, and feeds the inflation narrative that has the Fed, BoE and SARB all wary of easing. Trump’s remarks pointing to a contained conflict have taken some heat out of the move, but the geopolitical risk premium remains firmly embedded in the price.
Currencies
The DXY slipped to around 99.0, its weakest level in nearly two weeks, after Waller’s comments opened the door to a Fed hold and undercut the greenback’s yield support. The index is down roughly 0.9% on the month, a modest but persistent softening. The dollar’s near-term direction now hinges almost entirely on today’s payrolls data as a strong print that revives hike bets would likely reverse this week’s slide, while a weak number would confirm the softer trajectory and extend dollar weakness across the majors and emerging-market currencies alike.
The euro steadied just below $1.16/€, up a marginal 0.14% on Thursday, though it continues to hover near a two-week low. The EUR/USD pair is caught between a softer dollar, which offers support, and the eurozone’s own mixed growth and inflation picture, which caps the upside. With the ECB’s tightening expectations being gently pared as energy prices cool, EUR/USD lacks a clear domestic catalyst and is trading largely as the mirror image of the dollar leg – making today’s US jobs data the more important driver for the pair.
Sterling stabilised around $1.35/£, up a slight 0.07%, pausing a recent selloff. The pound is squeezed between two opposing forces – a softer dollar and a hawkish BoE offer support, while energy-driven inflation and acute concern over the UK’s fiscal position weigh on sentiment. Cable’s (GBP/USD) inability to rally more convincingly despite the dollar’s two-week low speaks to those domestic headwinds. Sterling remains one of the more vulnerable majors to any renewed rise in the oil price or deterioration in the UK fiscal outlook.*Please note, all information is at the time of writing.
Key indicators:
GBP/USD: 1.3527
GBP/EUR: 1.1639
GBP/ZAR: 21.65
Brent Crude: $95.71
Gold: $4,470.38
Sources: IMF, BIS, ECB, SWIFT (via Trade Treasury Payments)
Written by Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.
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