The latest BIS data shows that international credit to non-banks reached a record USD34.7tr in Q1.

There’s been a lot written about the potential for the US dollar’s global dominance to decline; something that might also reduce its value. Most of these debates have been couched in terms of FX reserves, where there is clear evidence that US dollar dominance is waning. But this is not the only area where the US dollar is still dominant.

Another area is international lending, whether bond issuance or other types of loans. The latest BIS data shows that international credit to non-banks reached a record USD34.7tr in Q1. That surpasses the prior record of USD33.6tr just before the 2008 global financial crisis. The US dollar is dominant with lending that amounts to more than three times that of the euro and, for emerging and developing economies, US dollar loans are over five times those of the euro. But here too the dominance is waning, not just relative to the euro but also to the renminbi.

The BIS estimates that, cumulative international renminbi credit to EM’s has risen by USD373bn in the past four years, with euro credit up around USD75bn. In contrast, US dollar credit has fallen by USD257bn over the same period. This may seem significant but we do have to bear in mind that many of these credit flows just respond to the interest rate cycle.

For instance, the sharp rise in US rates relative to Chinese rates probably accounts for a good chunk of the discrepancy, and the same goes for the euro. Taking EM’s and DM’s together, US dollar credit has risen by 5% in the past year; half the rate of the euro. Looking ahead, if we assume that the Federal Reserve will take policy rates down and yields fall in tandem, we could see a shift back towards more US dollar borrowing. Or could we?

We question this because we think there might be more structural reasons why the US dollar could continue to lose out and why both borrowers and investors should look towards the euro and away from the US dollar. The first reason is that there is already evidence that bond investors are warming to euro-denominated debt relative to US dollars.

For instance, emerging and developing country companies and governments have issued around EUR90bn of paper so far this year which is the most since 2014. EM governments alone have sold more euro debt this year than the whole of 2024. Of course, this only makes a small dent in US dollar dominance as around 68% of EM sovereign debt is in dollars and 30% in euros, and we also have to bear in mind that the euro debt is largely concentrated in Eastern Europe.

Nonetheless, Steven Barrow, Head of Standard Bank G10 Strategy said that global investors are showing signs of wanting to diversify away from US risk. That’s for many reasons which include things like US tariffs, political pressure on the Fed over rate policy, an over-concentration by investors in US assets and finally, scepticism about the future value of the dollar. In other words, if emerging market issuers want to borrow in a non-domestic currency, they may find a better reception amongst investors if they sell bonds denominated in euros than US dollars. The same goes for other forms of international borrowing. The more-cyclical argument for borrowers to prefer euro (or renminbi) loans, which relates to the lower level of interest rates compared to dollar loans, may actually prove more persistent than many imagine.

“We feel that there could be more permanent reasons for US rates to stay relatively high, such as a structural rise in US inflation borne of tariffs as well as migration policy. In addition, the possibility of a ratings outlook downgrade by ratings agencies in the US, due to government budgetary largesse, could keep yields elevated. In sum, we think that prospective borrowers should be attracted to euro debt issuance over US dollar issuance given lower rates and more robust investor appetite. At the same time, those buying international bonds should err to the euro as bond prices are more likely to go up than in the US, the euro is expected to rise, and as part of much-needed diversification away from the US dollar.