What Does Exclusion from the “Dollar System” Mean for a Country?
[4m 58s read]
Georgios Atsalakis, Economist, Associate Professor, Technical University of Crete
Ioanna Atsalaki, Lecturer, Technical University of Crete
Data Science Laboratory
The threat that a country, a bank, or a major corporation may be excluded from the “dollar system” is often perceived as just another form of economic sanction. In reality, however, it is something far more profound. The dollar is not merely the currency of the United States. It is simultaneously the world’s leading reserve currency, a principal unit for pricing international trade, the dominant currency in foreign-exchange markets, and the foundation of an enormous global financial network.
Consequently, excluding a country from the dollar system does not simply mean that it can no longer use dollar banknotes. It means that the country begins to lose access to an entire financial ecosystem.
At the end of 2025, the dollar still accounted for approximately 56.8% of global foreign-exchange reserves, while the euro accounted for around 20.3% and the Chinese renminbi for only about 2%. At the same time, according to the Bank for International Settlements, the dollar was on one side of 89.2% of all transactions in global foreign-exchange markets in 2025. The renminbi, despite its growing international role, accounted for 8.5%. These figures help explain why exclusion from the dollar system can amount to a form of economic asphyxiation.
The Dollar Is More Than Just a Currency
The first mistake is to assume that the “dollar system” simply means the use of the US currency. In reality, it encompasses US banks, correspondent banking relationships, US Treasury markets, international payments, trade finance, debt issuance, insurance, capital markets, and an enormous network of contracts denominated in dollars.
A bank in Asia or the Middle East does not need to be located in New York to depend on this system. If it wants to clear dollar-denominated payments, it will generally require direct or indirect access to US financial institutions.
This is precisely why US secondary sanctions can be so powerful. The underlying message to a foreign bank is essentially:
“You can continue doing business with the sanctioned country, or you can maintain access to the US financial system. But you may not be able to do both.”
For most internationally active banks, the choice is almost self-evident.
What Happens to Imports and Exports
For a country excluded from the system, the first major difficulty arises in international trade. Even when neither party to a transaction is located in the United States, a substantial proportion of international trade is invoiced and settled in dollars.
Oil, natural gas, agricultural commodities, metals, shipping services, and many internationally traded raw materials use the dollar as a common unit of transaction.
If a country can no longer make dollar payments easily, it must therefore find alternative channels. It may use euros, renminbi, rupees, dirhams, gold, or even clearing and barter arrangements. However, each alternative introduces additional costs, greater complexity, and usually lower liquidity.
A foreign supplier may also say:
“I will continue selling to you, but only if you pay me more because I am assuming greater financial and political risk.”
The sanction therefore gradually becomes a risk premium imposed on the entire economy.
Why US Treasury Securities Matter So Much
This is perhaps where one of the most important advantages of the dollar system lies.
A country running trade surpluses accumulates foreign-exchange reserves. Those reserves have to be invested somewhere.
The crucial question is:
Where can a central bank invest hundreds of billions of dollars with relatively low risk while remaining confident that those assets can be liquidated quickly whenever necessary?
The US Treasury market remains the most important answer.
The Federal Reserve has emphasised that the depth and liquidity of US financial markets remain essentially unmatched internationally and that there is an enormous supply of relatively safe dollar-denominated assets. At the beginning of 2025, foreign investors held approximately $9 trillion in US Treasury securities, representing roughly 32% of marketable Treasuries.
This creates a self-reinforcing mechanism:
The dollar is used because it is liquid; it is liquid because it is used everywhere; and it is used everywhere because there is an enormous market for safe dollar-denominated assets.
Why the Renminbi Is Not Yet a Full Alternative
In theory, the Chinese renminbi could become a major competitor to the dollar. China is one of the world’s largest economies and one of the largest trading partners of dozens of countries.
There is, however, a fundamental difference: China’s financial system is not as open as that of the United States.
China continues to maintain significant capital controls. An investor may acquire renminbi, but does not always enjoy the same freedom to move very large amounts of capital into and out of the country as is possible in the United States.
This distinction is crucial for central banks.
A reserve currency must not only be credible; it must also be immediately convertible and highly liquid during periods of crisis.
The renminbi’s limited share of global foreign-exchange reserves — approximately 1.95% at the end of 2025 — indicates that central banks still regard it primarily as a complementary reserve asset rather than as a substitute for the dollar.
What Happens to the Currency of an Excluded Country
Financial exclusion generally places pressure on the affected country’s domestic currency.
Businesses and households attempt to obtain dollars or other strong currencies.
Demand for foreign exchange rises.
The domestic currency depreciates.
Imports become more expensive.
Inflation accelerates.
The central bank may attempt to support its currency by drawing on its foreign-exchange reserves. However, if part of those reserves has been frozen or is otherwise inaccessible, its capacity to intervene is dramatically reduced.
A vicious cycle can therefore emerge:
sanctions → shortage of foreign currency → depreciation → more expensive imports → inflation → capital flight → further depreciation.
The Greatest Problem Is Financing
The country does not merely lose the ability to make payments easily. It also loses the ability to borrow normally in international financial markets.
Foreign banks withdraw.
Investors demand substantially higher yields.
Insurance companies become reluctant to cover transactions.
Shipping companies become concerned about sanctions exposure.
Credit-card companies and international payment networks may withdraw from the market.
Even businesses that are legally permitted to continue trading may decide that the risk is simply too great.
This phenomenon is known as over-compliance: companies avoid even legally permissible transactions because they fear that they might inadvertently violate sanctions.
As a result, a country can become more isolated than the official sanctions regime itself actually requires.
But There Is Also a Risk for the United States
The “weaponisation” of the dollar has another side.
The more frequently the United States uses access to the dollar system as an instrument of geopolitical pressure, the greater the incentive for other countries to develop alternatives.
Russia, China, and other economies have increased their use of alternative currencies, while several central banks have substantially increased their purchases of gold.
So far, however, this shift represents gradual diversification rather than the replacement of the dollar.
The Federal Reserve has noted that even after the sanctions imposed on Russia, the dollar’s share of global foreign-exchange reserves remained broadly stable at around 58% during the 2022–2025 period.
The United States’ real advantage, therefore, does not derive solely from its political power.
It also stems from the fact that the rest of the world does not yet possess a complete substitute for the dollar system.
Replacing the dollar requires far more than creating or promoting another currency. A credible alternative would simultaneously require deep bond markets, free movement of capital, strong institutions, legal certainty, enormous liquidity, and confidence that hundreds of billions of dollars’ worth of capital can enter and leave the financial system without arbitrary political restrictions.
Achieving all of this is considerably more difficult than simply internationalising another currency.
This is why the threat “you will be excluded from the dollar system” remains one of the most powerful non-military instruments available to the United States.
It does not simply mean that a country loses access to a currency.
It means that the country risks losing access to the central circulatory system of the global economy.
