Why the World Keeps Buying Dollars Even When It Hates the Dollar
Why does the dollar continue to dominate despite its apparent vulnerabilities?
Background to Problem
Let's begin with an appreciation of the three layers American economy.
The United States remains the world’s largest economy, producing roughly USD 28 trillion of GDP output each year and anchoring the global financial system through the dollar, Treasury bonds and deep capital markets.
Yet beneath this scale lies a chronic fiscal imbalance: federal spending persistently exceeds tax revenues, leaving Washington with multi-trillion-dollar deficits and a rising debt stock that now surpasses 120% of GDP.
These domestic shortfalls mirror a massive external imbalance. The US runs a structural trade deficit - importing more than it exports - which sends dollars abroad.... The production of EM workers fill the shelves at Walmart; the USD profits of EM corporations are converted to local currency by their central banks who place these dollars in safe USD assets, pusing up demand and thus asset values in America (... for those who have assets).
So every international transaction must balance, and these profits, ie those same dollars, return to America - American assets - via the CGA (the Capital and General Account), ie the capital and financial accounts, as foreign purchases of US assets... assets such as Treasury bonds, US property, SnP500 equities, USD bank deposits (e.g the famous ~300 billion dollars of Russian sovereign assets held at Euroclear in Belgium).
These three layers - economic size GDP, fiscal deficits, and trade-capital flows - form the framework needed to understand why the dollar continues to dominate despite its apparent vulnerabilities. And what that means in financial terms for workers, corporate and governing elites.
The Problem
The behaviour of foreign exporters and central banks often appears contradictory: why continue recycling trade surpluses into US assets if the dollar is overvalued, politically weaponised, and these days it's more and more fundamentally unstable?
The answer is structural. The global monetary system forces countries into the dollar, even when it is clearly against their long-term interests. This is the core logic that underpins Triffin’s Dilemma and Brent Johnson's Dollar Milkshake dynamic.
So let's recap and expand ...
1. The Dollar System Is a Closed Loop - Someone Has To Hold those Dollars
When a Thai exporter sells goods to an American customer, they are paid in dollars. The exporter can convert those dollars into baht, but of course that doesn’t remove dollars from the system - they go somewhere. For every seller of dollars there must be a buyer. Ultimately, the country receiving the export surplus ends up with dollar profits that must be held somewhere.
The question is not “should we hold dollars?” but rather “who will end up holding them?”
The answer is almost always the central bank of the country concerned. Why?
Exporters convert their USD profits into local currency at their bank; their bank deposits excess dollars at their central bank... it absorbs the USD (doesn't exchange them) to prevent the local currency from rising. The central bank must then invest those dollars and there's only one market on earth big and liquid enough: the US economy and Treasuries.
This is why the massive 38 trillion dollar debt is not a problem but a necessity.
2. Domestic Markets Are Too Small to Absorb Surpluses
For emerging markets, this is decisive. No EM country has financial markets deep enough to absorb annual trade surpluses without destabilising its own asset prices and currency. Attempting to invest export earnings domestically would drive:
- currency appreciation
- real estate bubbles
- equity overvaluation
- inflationary pressure
The central bank stepping in acts as a “shock absorber”: it prints local currency, thus expanding the local economy to include the new profits ; and buys exporters’ dollars with this new money, and then stores those dollars safely abroad.
The result: FX reserves rise, mostly in US Treasuries.
3. Using Another Currency Is Not a Viable Escape
Here are the four main core reasons EM central banks are cutting down USD exposure:
a/ US fiscal dominance: exploding trade deficits and fiscal debts make Treasuries structurally unsafe. The Fed is in an impossible position: Washington is generating more and more debt, obliging the Fed to expand the monetary supply in order to provide liquidity to essentially pay off the govt's interest and roll over, which pushes up inflation, and inflation means the purchasing power of the dollar is falling. Do you think EMs and investors want to put their savings into a currency that is losing value? ... they want more interest and thus the descent spirals further.
b/ Sanctions risk: USD reserves can be frozen or seized, so they are no longer “neutral”.
c/ Poor real returns: Treasury yields no longer beat inflation, eroding EM national savings.
d/ Dollar volatility: every USD surge causes crises in EM currencies, debt, and domestic economies. If not US treasuries or safe US assets generally, then where else could a successful EM economy store its profits?
There are theoretical alternatives: the euro, yen, yuan, or gold. In practice, none currently work.
- Euro: fragmented sovereign bond market, political risk, banking fragility*.
- Yen: near-zero yields, demographic decline, too small for global recycling.
- Yuan: completely illiquid internationally, capital controls, unreliable legal system.
- Gold: safe but cannot absorb trillions per year; too illiquid compared to Treasuries.
Central banks therefore hold their noses and buy US assets. The system leaves them no meaningful alternative.
4. Why They Don’t Simply Dump Dollars
Even if they want to reduce exposure, doing so at scale is nearly impossible.
- Selling large amounts of USD would cause their own currencies to soar, killing exports.
- Dumping Treasuries would crash their value — hurting the seller most.
- Moving into other currencies risks catastrophic FX losses.
- Diversifying into gold is slow, discreet, and limited by market depth.
Hence the “dollar trap”: everyone wants out, but nobody can leave first.
5. Capital Account Surpluses Are the Accounting Mirror of Trade Deficits
This is often misunderstood but simple. If the US runs a trade deficit of $1 trillion, then by double-entry accounting:
- The US imported $1 trillion of goods
- The rest of the world accumulated $1 trillion of claims on the US
Those claims show up as:
- foreign holdings of Treasuries
- purchases of US property
- EM central banks’ FX reserves
- investments into US equities
The trade and financial accounts must always net to zero. Every deficit dollar must be held by someone.
6. Why This Continues Even If the Dollar Is Declining
This is the paradox:
foreigners keep accumulating the very currency they fear will lose value.
But structurally:
- They need dollars to trade globally.
- They must prevent their own currencies from rising.
- They need safe assets for reserves.
- They have no viable alternative safe asset market.
- The system is too large and too path-dependent to change quickly.
Many central banks are quietly switching their marginal reserves into gold, but they cannot completely exit the dollar system without collapsing their domestic economies.
This is why collapse narratives oversimplify: the dollar’s end will be a process, not an event, and everyone will be dragged through it together.
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