Matteo Maggiori on Geoeconomic Power & the U.S. Dollar’s Role As Global Reserve Currency
Matteo Maggiori is the Moghadam Family Professor of Finance at the Stanford Graduate School of Business and a Senior Fellow at the Stanford Institute for Economic Policy Research. He is co-founder and director of the Global Capital Allocation Project and a recipient of the Fischer Black Prize, the Bernacer Prize, and Guggenheim and Carnegie Fellowships.
By Aiden Singh, February 17, 2026
Introduction
Professor Matteo Maggiori’s research focuses on international macroeconomics and finance, with particular emphasis on exchange rates, global capital flows, the international monetary system, and the sources of geoeconomic power.
His work examines how financial frictions, fiscal capacity, and market structure shape currency dynamics, the production of safe assets, and the global role of the U.S. dollar.
He has written extensively on topics including exchange rate determination under imperfect financial intermediation, reserve currencies, home-currency bias in international investment, and the stability of the global monetary system. .
In our conversation, Professor Maggiori and I discuss how trade and financial linkages generate geoeconomic power, why the U.S. dollar occupies a uniquely dominant position in the global system, and how fiscal credibility underpins reserve currency status.
We also examine the risks posed by rising public debt, the strategic use of financial sanctions, and the emergence of alternative payment systems.
The discussion highlights the fragility of the current international monetary order and explores how overuse of financial power may ultimately undermine the very dominance on which it rests.
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Geoeconomics
Aiden Singh: What is geoeconomic power, and how does it relate to what’s going on in the world today?
Matteo Maggiori: Geoeconomic power can be understood as large countries, such as the United States or China, using the trade and financial relationships of their economies to exert influence abroad.
This influence may be exercised to achieve economic objectives, such as encouraging the construction of a particular factory or mine in Africa. It may also be used to pursue political objectives, for example when the United States seeks to prevent a European firm from selling advanced semiconductor machinery to China. In some cases, the objective is purely political, such as influencing regime change in another country or securing the signing of a specific treaty.
At some level, this is a strategy that great powers have employed for centuries. One can think of the British Empire or the Medici family in Renaissance Florence. In this sense, geoeconomic power is not unique to the contemporary United States and China. Rather, they represent the current incarnation of a long-standing pattern in international politics.
At least since the end of the Cold War, the last few years have probably seen the largest change to the global economic order. The current American administration has been particularly active in exerting geoeconomic power, often in ways that appear more explicit or visible than in earlier periods. China has likewise exerted substantial influence through initiatives such as the Belt and Road, deploying extensive diplomatic and economic efforts, especially across emerging markets and Asia. Geoeconomic power has therefore not disappeared. It has intensified, becoming increasingly salient in recent years and central to contemporary policy debates.
Aiden Singh: What are the sources of geoeconomic power?
Matteo Maggiori: I think these sources of power arise from a handful of factors. While they originate in existing trade and financial relationships, they ultimately stem from the ability to bundle these relationships together.
For example, when China engages with a country in Africa, it may bundle manufacturing relationships, government aid, and infrastructure projects. These activities would normally be undertaken by separate and unrelated actors. Instead, they are combined into a single package, allowing the government to signal that deviation from its demands could trigger retaliation across multiple dimensions simultaneously.
For countries the size of the United States or China, or for any economy deeply embedded in a wide range of international activities, this kind of bundling can be extremely powerful.
A second component operates at the level of individual activities and depends fundamentally on the availability of alternatives. If access to semiconductors or to the payment system is withdrawn, the key question for the targeted country is whether a viable substitute exists. Power is greatest when what is being withdrawn has no close alternative.
In the case of the United States, much of this power derives from the financial system, particularly from its most basic architecture, such as payment systems and asset custody. These elements were traditionally viewed as unremarkable or purely technical aspects of finance rather than as strategic assets. Yet they constitute the core infrastructure on which economic activity depends.
This infrastructure confers significant power because exclusion from a U.S.-centric payment system leaves very few workable alternatives. While this does not imply a return to barter, the available substitutes are far less efficient. Moreover, the importance of the payment system extends well beyond the financial sector. Manufacturing firms require it to sell goods and to purchase inputs, making it integral to the functioning of large parts of the economy.
In this sense, finance is a sector in which the United States holds a particularly dominant position. It is difficult to exit, offers poor substitutes, and affects a wide range of industries rather than a single sector. Industries with these characteristics tend to generate substantial geoeconomic power.
In China's case, sectors such as the sourcing and processing of rare earths may exhibit similar features, but most basic manufacturing sectors do not. If access to a highly substitutable good is restricted, alternatives can usually be found. Oil provides a useful illustration. A single oil-producing country does not wield significant power on its own, because oil can be sourced from other producers. Differences in quality exist, but oil remains largely substitutable. By contrast, at its peak, OPEC exercised considerable power because it controlled many sources of oil simultaneously. Oil is a critical input for production across the economy, and exclusion from all major sources constitutes a powerful constraint.
From this perspective, geoeconomic power is fundamentally about market dominance rather than technological sophistication alone or the mere possibility of substitution.
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American Geoeconomic Power
Aiden Singh: Let’s turn to the geoeconomic power of the United States. A central component of this power is the unique role of the U.S. dollar in the global economy, which connects directly to your research on foreign currency holdings and international investment.
To what extent are investors willing to hold debt denominated in foreign currencies, and how does this differ in the case of the United States? How does this pattern relate to America’s geoeconomic power?
Matteo Maggiori: This is an excellent question. Let me approach it in three layers.
The first concerns a paper I co-authored several years ago with Jesse Schreger and Brent Neiman. In that paper, we documented a surprising empirical regularity that we termed home currency bias, even among large developed economies. We are not examining small or illiquid markets, but rather countries such as the United Kingdom, the Eurozone, Canada, and Australia. What we find is that the vast majority of bonds issued by these countries and held by foreign investors are not denominated in the issuer’s domestic currency.
For example, when European firms issue bonds that are held by foreign investors, those bonds are typically not denominated in euros. Instead, they are often issued either in U.S. dollars or in the currency of the foreign investor. A Canadian investor, for instance, is disproportionately likely to hold Canadian dollar-denominated bonds issued by a European firm. This pattern is striking precisely because these are large, advanced economies in which the overwhelming majority of bonds issued domestically are denominated in the domestic currency. In Europe, most bonds are issued in euros.
The United States stands out as the major exception. When foreign investors hold U.S. assets, even setting aside U.S. Treasury securities, which are by definition dollar denominated, they are highly willing to purchase the bonds of U.S. corporations in dollars. This represents a significant deviation from the pattern observed elsewhere and accounts for an important dimension of the international role of the dollar.
That is one reason the dollar is special. There are, of course, other dimensions as well, including the currency in which goods are invoiced and the interest rates at which the U.S. Treasury is able to borrow. However, the focus of that paper was specifically on home currency bias and the exceptional position of the United States in this regard.
If we step back from that particular paper and consider the full range of the dollar’s functions, the dollar appears truly exceptional. It does not resemble any other currency in the data. Even currencies such as the euro or the yen, which come closest, differ in important and systematic ways.
This brings us back to the broader question of how much geoeconomic power the United States derives from this position. Our conclusion, based on our research, is that the amount is substantial.
Much of this power stems from the basic financial architecture of the global system. Many of the systems that underpin global finance are U.S. centric. They are either physically located in the United States or subject to significant U.S. influence. A prominent example is the SWIFT messaging system. While it is formally a Belgian cooperative, in practice its governance and operation are heavily shaped by U.S. influence. Similar dynamics apply to other critical components of the financial system.
The threat of being disconnected from these systems is highly consequential because the affected country has very limited alternatives. These systems are essential for a wide range of economic activities, and exclusion from them imposes severe costs.
We have recently argued that China is well aware of this dynamic and is actively attempting to build alternative systems, in part for defensive reasons. Chinese policy-makers recognize that geopolitical tensions with the United States could escalate and that exposure to sanctions represents a significant vulnerability. Their objective is to ensure that, even if they were partially disconnected from the U.S. centered financial system, they could continue to operate at scale.
If China succeeds in developing viable alternatives, it could also offer them to other countries in exchange for economic or political concessions, particularly to countries seeking to hedge their dependence on the United States.
This returns us to the core argument that geoeconomic power derives from extreme concentration and dominance within a sector. At present, China’s role in international currency usage remains relatively small. Although its presence in the global financial system is growing rapidly, its overall share remains limited.
One of the key findings of our work is that it is a policy mistake to assume that as long as the United States remains dominant, with shares on the order of fifty or sixty percent, an increase in China’s share from three percent to ten percent would be inconsequential. From a power perspective, such a shift would be highly significant. Even a modest alternative can meaningfully dilute American power. To illustrate, consider an attempt by the United States and its allies to sanction a country the size of Russia or Brazil. If China accounts for ten percent of international currency usage, that alone would provide a sufficient alternative for countries of that scale. This is why the issue is so important and why it remains an active area of research.
Aiden Singh: Can you describe the international monetary system and the international price system, and outline the central role of the United States within them?
Matteo Maggiori: I think of the international monetary system as having at least three standard components.
The first is the global financial architecture. In 1944, toward the end of the Second World War, countries came together to think systematically about how to set up the global financial system. This process led to the creation of many of the international organizations that still exist today, including the IMF, the World Bank, and the predecessors of what we now call the WTO. These institutions are fundamentally concerned with making the global financial architecture function.
The second component is the system of exchange rates. Immediately after the war, countries established the Bretton Woods system, under which exchange rates were largely pegged to one another. In practice, currencies were pegged to the U.S. dollar, and the dollar itself was pegged to gold. In 1973, that system was abandoned, and we moved to the regime we know today, in which many currencies float freely against one another and none is pegged to gold.
The third component, which is where my own research has largely focused, concerns the production of safe assets. While risky assets are abundant in the global economy, truly safe assets are difficult to produce. One of the central roles of the monetary system, especially at the international level, is to generate these safe assets. Historically, the world relied first on gold, then on sterling, and eventually on U.S. Treasuries - that is, dollar-denominated liabilities.
I therefore think of this function of the international monetary system as posing a basic question: can the system produce a sufficient quantity of safe assets, and can it do so in a stable way, or will it eventually become unstable? As a country expands its issuance of the global safe asset, it may become vulnerable to a self-fulfilling loss of confidence, in which foreign investors begin to doubt its ability to honor those commitments. Such a shift in expectations could lead to a sharp increase in interest rates, at which point the country may decide that borrowing on those terms is no longer sustainable.
Much of my work with Emmanuel Farhi is situated in this area. From our perspective, the international monetary system is best understood as an arrangement for the production of safe assets, and the central question is whether that arrangement is stable or unstable.
Another related concept, is the international price system. Economists typically think of the international price system in terms of the currency in which goods are invoiced. For example, when a European firm sells goods to Brazil, the relevant question is which currency is used to denominate that transaction.
There has been a large body of work on this topic, and one important idea is that of vehicle currencies. The U.S. dollar, for instance, is frequently used to invoice trade even when neither party to the transaction is American, such as when European firms sell goods to Brazil.
The aspect of the international price system that I have been particularly interested in is how price rigidity, the fact that prices do not adjust instantaneously, relates to the ability to issue safe assets. That connection has since become the subject of a growing literature.
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Becoming the Global Reserve Currency
Aiden Singh: We’ve discussed the special role of the dollar, American geoeconomic power, and the ways in which the United States exerts that power.
Let’s return to the origins of this system and ask a more fundamental question: how does a currency become the global reserve currency?
Matteo Maggiori: For me, the crucial aspect we have emphasized is really fiscal space and fiscal commitments, which of course are now central to policy discussions.
When we first started this work, that really was not part of the discourse. In fact, people thought it was a little strange to even raise fiscal issues in the U.S. context.
There are certainly other things that matter, the most obvious being the size of the country. Nobody thinks Switzerland is going to be the cornerstone of world financial markets; its GDP is just too small.
But among countries that could plausibly issue a reserve currency, I think what really matters is reputation, and specifically, a reputation for delivering safety.
That is fundamentally a fiscal argument. If I am in one of these countries, I want to convince global investors that my debt is safe, because then I get to borrow cheaply. And everyone understands that “safety” is a statement about future behavior. It can mean not defaulting outright, but it can also mean not inflating away the debt, not depreciating the currency excessively, and not imposing capital controls. You might promise investors that they can take their money out, but when the moment comes, you impose a tax or restriction to prevent capital from fleeing.
All of those actions impair the value of what investors gave you. You promised something safe and liquid, and then you reneged on that promise. Why is that temptation so strong? Because investors gave you a lot of money, you are in trouble, and you are looking for ways to reduce your repayment.
What is truly special about the United States is its ability to let foreigners lend enormous amounts to it and, even in moments of crisis, resist those temptations. The United States did not tell investors they could not take their money out during a financial crisis, nor did it pursue a mix of monetary and fiscal policies that would have substantially reduced the value of their claims. Those options would have been extremely attractive for a country facing a global banking crisis. An emerging market would normally succumb to that temptation. The United States did not, and that is a core reason American assets have such a strong reputation for safety.
How do you get there, though? Most countries start with a low reputation. You are the new country on the block. When the United States was first created, Alexander Hamilton, the first Secretary of the Treasury, was very clear about this. He wrote that there are two kinds of countries: those that fulfill their promises and develop functioning markets, and those that do not. That aspiration was clear from the very beginning for the United States. Trust does not come automatically, however. Reputation improves only as crises occur and, again and again, you fulfill your promises. That is how credibility is built.
Think about China in this context. In some of our recent work, we describe China as being at the beginning of that process. It is a large country, militarily powerful, deeply integrated into global trade, and it has many of the characteristics associated with a potential reserve currency issuer. It even has an enormous and relatively liquid domestic bond market.
However, if you are a foreign investor, what do you worry about? You worry that on a normal day, you can probably bring your money into China and invest, but when the next major crisis hits, will you be allowed to take it out?
Our view is that China’s trajectory depends on whether it continues to fulfill its commitments over repeated crises. To the extent that it does, it will attract more foreign capital and continue liberalizing. But the reality is that most countries do not make it all the way. Along the way, they find it too costly to keep honoring those promises, intervene in ways that hurt bondholders, lose their reputation, and have to start over. That is why it is extremely rare for countries to reach the level of credibility the United States has achieved.
Now, to be clear, the United States itself is currently experiencing probably the greatest stress on these issues that we’ve seen in a long time. Questions about the independence of the Fed, very large and persistent fiscal deficits, and a rising debt burden all put pressure on these commitments.
Even for the United States, you cannot assume that because you’ve been safe for a long time, you’ll always be safe. Maintaining credibility becomes more expensive as debt accumulates. The problem is not immediate, but if the U.S. does not get its fiscal situation under control, it is reasonable to worry about whether, down the line, the country will continue to have the institutional strength needed to fulfill those promises.
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Benefits of Reserve Currency Status
Aiden Singh: In terms of the benefits of reserve currency status, you have analyzed the safety premium that the U.S. dollar receives due to its role as the global reserve currency. What is that safety premium, and how large is it?
Matteo Maggiori: So the safety premium is simply how much lower the expected return is on U.S. dollar-denominated safe assets compared to alternative assets.
You can think about it this way. We keep calling something a “safe asset,” but what does that really mean? A safe and liquid asset is something I can hold today and sell in a crisis, or in a state of the world where I have a very high desire for wealth and liquidity, without changing its value too much. It is not going to move against me in the way an illiquid asset would. It either retains its value or may even appreciate.
The dollar appreciating massively during October 2008 is a typical sign of safety. If I am a foreigner, that means I hold an asset that is worth a lot of money and that I can liquidate easily at the moment when I most need it.
That tells you that, in equilibrium, ahead of time, I am willing to hold this asset at very low rates of return, potentially even negative ones, because it has a strong hedging or insurance property.
Estimating how large the safety premium is remains very difficult. Estimates range from around ten basis points at the low end to around one and a half percent at the high end.
You have to remember that the stock of assets to which this applies is extremely large. Even a one percent safety premium therefore represents a very large boost to the United States, since it is one percent applied to a massive stock of assets.
That is the basic idea. This view of the world focuses mainly on the safety aspect. There are many other benefits to being a reserve currency. One of them is that, to the extent that reserve currency status also comes with centralizing the operation of the financial system, additional economic benefits arise.
You gain significant power from controlling these basic financial services. They do not have to be combined, but they exhibit strong strategic complementarities. Historically, the two ends have tended to come together.
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Current Status as Global Reserve Currency
Aiden Singh: Let’s consider how American economic power is holding up today. Since the 2008 financial crisis, there has been extensive discussion about the possibility that the U.S. dollar could eventually lose its status as the global reserve currency. Yet here we are in 2025, and the dollar remains firmly entrenched in that role.
You have examined the use of the U.S. dollar relative to the euro as international currencies. What did your analysis find?
Matteo Maggiori: We found that the dollar, if anything, has become even more central.
There are a few clear reasons for this. One reason is that the global financial crisis actually served as a defining moment for the dollar as a safe asset, despite being an American-centered banking crisis. The United States fulfilled its obligations, capital controls were not imposed, and the currency appreciated. From the perspective of foreign investors, the dollar appeared exceptionally safe.
Few countries would have produced outcomes like these during a crisis of that magnitude. Crises of this scale are usually associated with sharp currency depreciation. Governments inflate, impose controls, and take various other actions that investors dislike. So if anything, when you look at the data, the dollar looks extremely central.
That coincides, at the same time, with a deterioration in the American fiscal situation and with the U.S. economy shrinking relative to the size of the global economy, as emerging markets and China grow.
The combination of an extremely important financial role for the dollar and a deteriorating fiscal situation is what worries economists like me. That said, these situations can be very stable for a very long time.
A lot of my research focuses on the fact that there have been many potential new entrants, many contenders to dislodge the dollar. The euro, which began in the 1990s, is just the most recent example.
We have to assess these contenders with the understanding that it is extremely hard to build a reputation like that of the United States. Most countries, either because they experience major crises or because of institutional weaknesses, fail to do so one way or another.
So I would not make any confident predictions that the U.S. role will be easy to dislodge. I am more worried that we may be pursuing policies that increase that possibility. Without fiscal concerns and without a weakening of American institutions, we would not even be having this conversation.
Aiden Singh: Does the United States’s willingness to wield its geoeconomic power incentivize other countries to move away from using the U.S. dollar as the global reserve currency? And given recent data, to what extent is this actually possible in the near term?
Matteo Maggiori: This relates to another important aspect, which concerns the payments system. The more the United States uses the financial system to exert power abroad, the stronger the incentives become for others to look for alternatives. This is especially true for countries like China, where political tensions are obvious, but even third party countries in Latin America, Africa, and Europe are thinking along these lines. In Europe today, this is a major policy concern. There is a growing sense that complete dependence on U.S. systems is undesirable.
This kind of fragmentation is not about replacing the dollar entirely. It shows up at the margins. Instead of being 100 percent dependent on a U.S. centric, dollar-based system, countries may want 10 or 20 percent of an alternative that they can scale up quickly if needed.
That is clearly happening. In Europe, for example, there are projects involving central bank digital currencies and broader payment system innovations to reduce reliance on U.S. systems like Visa and Mastercard. China has been developing its own payment system, CIPS.
They are still very small, but they are emerging at the edges. And as the U.S. exerts more of its power, the incentives to develop these alternatives will continue to increase.
One thing we have been studying is whether it is actually in the United States’s interest to limit its own coercive use of power. If you become too overtly coercive, you increase the incentives for others to move away from you, and as they do, your own power diminishes.
Committing to a set of rules can actually be in the interest of the incumbent. Even though those rules limit your own ability to exert power, they serve as a commitment device that reassures the rest of the world that it is safe to engage with you. Ultimately, that willingness to engage is what gives you power in the first place. If you become too much of a bully, you risk undermining that power as others search for alternatives they would not otherwise have pursued.
Put more practically, if you make it clear that, short of something like invading another peaceful country, you are not going to disconnect countries from the global payment system, that use of power does not create strong incentives to fragment. But if you start using it against close allies, or in ways that appear arbitrary, then the incentives for fragmentation rise sharply.
That kind of commitment is very important for maintaining American power, particularly in finance. And that is what I am worried about.
The next year is very important. Who knows what will happen. Like all good economists, I am extremely hesitant to make predictions, because I recognize that I have essentially zero predictive ability. Still, when I think about plausible developments, it is easy to imagine a world in which the United States continues to overuse its financial dominance in arbitrary ways, and in doing so gives rise to fragmentation.
That fragmentation does not require the dollar to suddenly face a direct rival on equal terms. The more concerning form of fragmentation is marginal rather than revolutionary. Other currencies, such as the renminbi, could come to account for five or ten percent of the global payment system, or acquire a clearly defined share of international currency usage.
From a power perspective, this would represent a meaningful dilution of American influence, even if it does not dramatically alter aggregate macroeconomic outcomes. And this type of outcome feels far more plausible over the next five to ten years than a sudden collapse or wholesale replacement of the dollar.
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Editing by Harpreet Chohan.