Dollar Dominance Is Eroding. Treasury Feels It.
The U.S. dollar’s role as the dominant global reserve currency has been structural subsidy for American borrowing costs for decades. Foreign central banks holding dollar reserves concentrate those reserves in Treasury securities — the deepest, most liquid dollar-denominated asset class in existence. That demand is not yield-seeking. It is institutional. And it has kept a floor under Treasury auction participation and a ceiling on the yields the government needs to pay.
That structural subsidy is shrinking. The GAO’s March 2026 federal debt management report (GAO-26-107529) documents the trend without overstating it: the dollar comprised 58 percent of global foreign exchange reserves in 2024, down from a peak of 72 percent in 2001. Over the same period, the share of Treasury securities outstanding held by foreign investors declined from 49 percent in September 2013 to 33 percent in September 2025 — a 16-percentage-point decline even as foreign investors continued adding to their holdings in absolute dollar terms.
The distinction between share and absolute value matters: the Treasury market has grown faster than foreign demand, meaning foreign investors have been absorbing a shrinking fraction of an expanding supply. Domestic investment funds and the Federal Reserve have filled the gap. That substitution has worked. The question the GAO raises — without answering — is whether it remains durable.
What drives dollar demand
The dollar’s reserve role rests on interlocking factors: the depth and safety of U.S. financial markets, the openness of the U.S. economy to global trade and capital flows, the credibility of U.S. fiscal and monetary institutions, and the practical network effects of using the dollar for global trade invoicing (approximately half of international trade) and international debt denomination (also roughly half). These factors reinforce each other. A dollar that is less trusted as a store of value is a dollar that is less useful for trade settlement. A dollar less useful for trade generates fewer reserve accumulation incentives.
The GAO notes that circumstances including concerns about fiscal sustainability, debt limit impasses, or reduced openness of the U.S. economy to global trade or financial markets could weaken the dollar’s global role. Each of these is a current policy variable, not a hypothetical. Tariff escalation, sanctions use as foreign policy instruments, and periodic threats of selective default through debt ceiling politics all register in the calculations of foreign reserve managers.
The composition shift within foreign demand
Among foreign holders, a compositional shift has occurred. Foreign private holdings surpassed foreign official holdings in 2023. Foreign official investors — central banks and sovereign wealth funds — are the more price-insensitive segment: they hold Treasuries for reserve management purposes and do not adjust rapidly to yield differentials. Foreign private investors — asset managers, hedge funds, arbitrageurs — are more responsive to relative value. As the mix shifts toward private foreign demand, the effective price sensitivity of the foreign investor class increases.
The dollar does not need to be displaced as the dominant reserve currency for borrowing costs to rise. A gradual, partial erosion — the kind already underway — is sufficient to reduce the structural demand floor that has historically kept Treasury yields lower than the pure economics of U.S. fiscal conditions might warrant.
The empire tax that the world paid the U.S. for running the global reserve currency is not being abolished. It is being slowly renegotiated, and the new terms are less favorable.