I recently came across a very interesting analysis, where ING Bank proposed a question I’ve been pondering: why is the US dollar benchmark becoming increasingly unstable in the foreign exchange market? The answer might be much more complex than you think.

Traditionally, we all said that the dollar’s movement is determined by interest rates and inflation. But the current situation is completely different. Trade policies, sanctions, diplomatic actions—these geopolitical factors are directly impacting the pricing logic of the forex market. Recent tariff announcements are a typical example, directly disrupting currency pairs. This isn’t small fluctuations; it’s a paradigm shift in the entire market.

ING’s analysis points out that central banks around the world have incorporated geopolitical risks into their decision-making frameworks. The dollar benchmark used to purely reflect economic data, but now it has become a barometer of political stability. This means traders and investors must track both economic reports and diplomatic developments—foreign exchange markets are no longer just a numbers game but a reflection of power dynamics.

Looking at the data makes this clear. The share of the dollar in global reserves dropped from 71% in 2000 to 59% in 2024. IMF data supports that this trend will continue. Central banks are actively diversifying their reserves—gold purchases hit record highs in 2024, and allocations to the yuan, euro, and yen are increasing. The underlying logic is clear: geopolitical blocs are reshaping reserve decisions, with countries allied with the US tending to hold more dollars, while rivals are reducing dollar exposure.

Even more interesting are the changes at the trade level. Bilateral agreements are increasingly stipulating settlement in local currencies. China-Russia trade is a typical example, with the use of yuan and ruble rising, and the monopoly of the dollar as an intermediary currency breaking down. New trade corridors created by nearshoring and friendshoring are also generating demand for alternative currencies. This is a structural change, not cyclical volatility.

Capital controls are back. During geopolitical crises, countries implement restrictions to manage capital outflows, causing dislocation between offshore and onshore dollar benchmarks. You’ll see offshore renminbi (CNH) trading at a premium relative to onshore renminbi (CNY), and this divergence makes hedging strategies much more complex. Investors now face higher basis risk—the dollar benchmark in a jurisdiction may not reflect global supply and demand at all.

What does this mean for traders? Traditional forex models are outdated. The explanatory power of interest rate differentials is declining, and geopolitical risk scores must be incorporated into trading algorithms. ING recommends including national strategic variables—this adds layers to analysis but improves accuracy.

Investors holding dollar assets face a new risk environment. Currency hedging becomes more expensive and less effective. ING suggests using options to manage tail risks and adopting dynamic hedging strategies. In the short term, the dollar benchmark will experience higher volatility—news-driven shocks will be more frequent. But the long-term trend is clear: the dollar’s dominance is gradually weakening.

Interestingly, this view isn’t just from ING. The Bank for International Settlements (BIS) has also noted the rising role of geopolitics in forex. A survey by the Global Foreign Exchange Committee shows that 68% of traders now see geopolitics as a primary driver, up from 45% in 2020. Academic research also supports this trend—an IMF study in 2023 found that geopolitical distance directly reduces bilateral dollar usage.

ING projects that the dollar’s share in global reserves could fall below 50% by 2030. This sounds like de-dollarization, but it’s actually a more complex reshaping process. The dollar will still be the main reserve currency, but its role is no longer unquestioned. A possible future is a dual-layer dollar benchmark—one for allies, another for other countries—adding complexity to the market.

Overall, the forex market is entering a new era. National strategies are now directly reshaping the forex benchmarks, and traders and investors must update their analytical methods. Market participants who ignore this shift risk falling behind. Geopolitical strategies must be integrated into forex models—this is not optional but essential.