US Dollar Outlook After Setser Remarks

The US dollar remains central to global finance, but John Setser's remarks on Bloomberg's Odd Lots podcast (Apr 16, 2026) re-opened debate about its medium-term trajectory and structural resilience. Setser emphasized supply-side factors — notably the availability of safe, liquid US assets and the political willingness of foreign official holders to retain dollar exposure — as decisive influences on demand for dollars over the next decade (Bloomberg, Apr 16, 2026). He cited data points on reserve composition and shifts in official holdings that, taken together, suggest an evolving but not yet terminal role for the dollar in international finance. The immediate market reaction was muted; longer-term implications range from portfolio reallocation among central banks to changes in the pricing of cross-border credit. This analysis synthesizes Setser's public remarks with IMF reserve data, US Treasury supply dynamics, and historical precedent to evaluate likely market and policy outcomes.

Context

Setser's interview reiterated long-standing fault lines in reserve currency debates: the persistence of US asset centrality versus rising geopolitical and economic incentives for diversification. He anchored his remarks to the Bloomberg Odd Lots episode dated Apr 16, 2026, and framed the question as one of equilibrium supply and demand for safe US liabilities (Bloomberg, Apr 16, 2026). Empirically, the IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) series has shown the US dollar commanding roughly 60% of global official reserve holdings in recent quarters (IMF COFER, Q4 2025), down from peaks above 70% in the late 1990s. Setser's point: that the decline is material but gradual, and driven more by diversification into other currencies and gold than by wholesale abandonment.

From a market-structure perspective, the dollar's role is reinforced by the depth of US Treasury markets and dollar-denominated intermediation. The nominal stock of outstanding US Treasury marketable debt exceeded $25 trillion by late 2025, providing scale and continuous pricing that other sovereign bond markets rarely match (US Treasury, Dec 2025). This scale matters: central banks, pension funds and global custodians require not just creditworthiness but daily liquidity. Setser argued that alternative pools of safe assets — euro area sovereigns, Japanese government bonds, or Chinese onshore bonds — lack the combined liquidity, fungibility and legal clarity to displace US Treasuries in short order.

Historical analogues are informative but imperfect. The British pound ceded reserve dominance to the dollar over the interwar period and after World War II in a process that involved financial fragility, capital controls, and the rise of a new hegemonic issuer. By contrast, today's environment features deeper capital markets, a more diffuse global investor base, and faster policy communication channels. Setser cautioned against expecting a replay: transition is likely to be incremental and asymmetric across regions rather than abrupt or universal (Bloomberg, Apr 16, 2026).

Data Deep Dive

Three quantifiable touchpoints framed much of the discussion: the dollar's share of reserves, the stock of US safe assets, and the pace of official diversification. On reserves, IMF COFER data as of Q4 2025 put the dollar at roughly 60% of reported foreign exchange reserves, the euro near 20%, and other currencies and gold constituting the remainder (IMF COFER, Q4 2025). This represents a decline of approximately 7-12 percentage points versus the high-water mark for the dollar in 1999–2001, but a substantially slower change than headline narratives sometimes imply.

On the supply side, US Treasury marketable debt — the primary pool of global safe assets — continued to expand through 2024–25 on fiscal and refinancing dynamics. Treasury issuance increased materially following pandemic-era deficits; market estimates indicated net marketable issuance exceeded $1 trillion year-over-year in several recent fiscal periods (US Treasury reports, 2024–2025). That expansion has two effects: it provides the quantity of safe assets required by global investors, but also introduces duration and convexity considerations that can influence non-linear demand responses to expected US policy moves.

Official diversification has been persistent but targeted. Several large reserve managers accelerated allocations to euros, yuan-denominated assets, and gold in the 2018–2025 window, but those reallocations were often modest in scale relative to overall holdings. Setser highlighted that while absolute holdings of non-dollar assets have risen, the dollar remains predominant in cross-border invoicing and in trade-finance pools — a functional stickiness that raw reserve percentages understate (Bloomberg, Apr 16, 2026). The pace of change appears governed more by operational and structural frictions than by ideology or short-term political signaling.

Sector Implications

Banking and fixed-income markets are most exposed to a gradual rebalancing of global reserve preferences. A sustained shift away from dollar assets, even at a rate of 1–2 percentage points of reserve composition per year, would alter global demand for Treasuries and could lift yields by increasing term premia. For example, a persistent 1% of global reserves reallocating from Treasuries into euro area sovereigns would imply tens of billions of dollars of marginal flows — enough to move spread-sensitive asset prices in short windows.

Currency markets already price these dynamics imperfectly. Since Setser's comments, cross-rate volatility in major pairs such as EUR/USD and USD/JPY reflected headline risk rather than structural flows: short-term intraday moves of 0.3–0.8% have been typical around major data releases in 2026 (Bloomberg FX tickers, Apr 2026). Corporates face hedging cost implications: a shallow but persistent depreciation of the dollar versus selected currencies raises the cost of hedging dollar-denominated liabilities for non-US borrowers and changes the competitive calculus in export-import pricing.

Emerging markets show heterogeneous exposure. Countries with large USD-denominated debt stocks or significant FX reserves in dollars are more vulnerable to a loss of dollar liquidity than peers with more diversified reserve mixes. For EM sovereigns, the critical transmission channel is roll-over risk in dollar funding rather than reserve composition per se. As such, contagion risk is concentrated in high-leverage, short-maturity profiles rather than across-the-board currency contagion.

Risk Assessment

The principal near-term risk to a stable dollar equilibrium is policy error: a significant US fiscal shock, a material reversal in Fed credibility, or geopolitical fragmentation that reroutes payments and settlement away from dollar-based infrastructure could accelerate reserve shifts. Setser underscored that political risk — sanctions regimes, on-off access to markets, or fragmentation of cross-border payment rails — can have outsized impacts relative to pure macro fundamentals (Bloomberg, Apr 16, 2026). These are low-probability but high-impact scenarios.

Market-structure risk is second-order but persistent. The availability of true substitutes for US sovereign paper depends on legal frameworks, repo market depth, and widely accepted settlement conventions. Shortfalls in these areas for rival asset classes create a stickiness in demand for Treasuries even when official rhetoric suggests diversification. Conversely, improvements in alternative markets — such as greater internationalization of China’s bond market or euro-area liquidity pooling — would progressively increase substitution elasticity.

There is also timing risk: a gradual, multi-year reallocation can be materially different in market impact from an abrupt stop. Historical episodes — e.g., portfolio shifts in 1998–2000 around emerging-market crises and 2008’s flight to quality — demonstrate that even incremental reserve changes can be amplified by risk-off liquidity squeezes. Monitoring term-premia, cross-currency basis swaps, and central-bank swap usage provides early warning signals for destabilizing transitions.

Fazen Markets Perspective

Fazen Markets assesses Setser's framing as broadly persuasive: the dollar's dominance is resilient but not immutable. Our contrarian read is that the most consequential shift will not be a wholesale dethronement but a functional re-pricing of certain dollar services. Specifically, we expect that within a decade the dollar will retain its role as the primary invoicing and settlement currency for global commodities and most cross-border finance, but that the elasticity of demand for US duration will rise. That is, central banks and large custodians will be more active marginal allocators rather than passive holders, leading to faster reflexivity in yields to policy signals.

We also note a critical asymmetry overlooked in much commentary: private sector adoption of alternative currencies or settlement rails can precede official reserve realignment and, by changing private-sector hedging behavior, can materially alter public reserve management choices. For example, expanded use of non-dollar trade invoicing in bilateral trade corridors or the growth of international stablecoins could lower the operational costs of non-dollar transacting and thereby increase the feasible pace of reserve diversification. Fazen maintains that monitoring private adoption metrics — trade-invoice currency shares, cross-border stablecoin volumes, and FX swap market depth — is as important as headline reserve data.

From an asset-class vantage, we anticipate higher term premia for Treasuries under modest reserve reallocation scenarios and increased volatility in cross-currency basis swaps. Portfolio managers should therefore expect a regime of higher structural liquidity demand for safe assets balanced against episodic repricing events, not a simple, monotonic decline in the dollar's global role. For further reading on related macro themes see our coverage on forex and macro.

Bottom Line

Setser's Bloomberg interview (Apr 16, 2026) underscores that the dollar's centrality is evolving, not collapsing; change will be driven by supply-demand for safe assets, operational frictions, and geopolitical developments. Expect gradual reserve diversification, higher elasticity of demand for US duration, and episodic market stress rather than a rapid de-dollarization.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.