Dollar erosion: The macroeconomic consequences of losing reserve currency status

July 20, 2026 - 10:53

The dollar's status as the world's primary reserve currency has long been a double-edged sword. Critics argue it keeps the exchange rate artificially high, hurting American manufacturers who struggle to export. But what would actually happen if that status went away? New economic modeling suggests the consequences would be real, though not catastrophic in the way some fear.

Researchers built a two-country economic model to simulate a scenario where foreign investors stop treating U.S. assets as the ultimate safe haven. The results show a permanent real depreciation of the dollar of roughly 9 percent. That is a notable shift, but it is not the collapse some predict. The bigger impacts would show up in borrowing costs. U.S. interest rates would rise by about 90 basis points, meaning the government and consumers would pay more to borrow.

The largest single cost would be to national wealth. The lost seigniorage -- the economic benefit the U.S. gets from issuing the world's go-to currency -- is worth close to one full year of gross domestic product. That is a massive transfer of value out of the American economy over time.

There are signs this shift may already be happening. The convenience yield, or the premium investors pay for the safety of U.S. debt, has been declining. Foreign ownership of U.S. public debt is also slipping. If those trends continue, the dollar's erosion may not be a future risk but a slow-moving process that is already under way.