--- title: "Pozsar's Bretton Woods III: Three Years Later [2/2]" description: "Gold above $4,000, Treasury holdings below $7T, but the dollar still dominates 88% of FX volumes. What Pozsar's Bretton Woods III got right and wrong." date: 2025-10-26 updated: 2026-05-04 author: "Philipp D. Dubach" categories: - "Macro" keywords: - "Bretton Woods III" - "de-dollarization" - "central bank gold reserves" - "reserve currency diversification" - "commodity collateral" - "Pozsar inside money outside money" - "dollar reserve share decline" - "central bank gold buying" - "geopolitical risk reserves" - "FRA-OIS spread" - "cross-currency basis swaps" - "renminbi internationalization" - "sanctions risk dollar" - "commodity volatility inflation" - "supply-driven inflation monetary policy" - "dollar dominance" - "Treasury foreign ownership" - "gold as reserve asset" - "monetary regime change" - "BRICS reserve currency" type: "Analysis" canonical_url: "https://philippdubach.com/posts/pozsars-bretton-woods-iii-three-years-later-2/2/" source_url: "https://philippdubach.com/posts/pozsars-bretton-woods-iii-three-years-later-2/2/index.md" content_signal: search=yes, ai-input=yes, ai-train=yes --- # Pozsar's Bretton Woods III: Three Years Later [2/2] *Philipp D. Dubach · Published October 26, 2025 · Updated May 4, 2026* ## Key Takeaways - Foreign central bank Treasury holdings fell from $7.5T to below $7T while gold rose from $1,900 to above $4,000/oz, consistent with gradual reserve diversification away from dollar assets. - Foreign ownership of U.S. Treasuries dropped from above 50% to 30%, but the dollar still dominates 88% of FX volumes, showing de-dollarization is real but slow. - The dollar posted its best year since 2015 in 2024 before declining sharply in 2025, complicating any simple narrative of dollar collapse or reserve currency decline. - Pozsar's most durable insight: central banks control the nominal domain but not the real domain, meaning supply-driven commodity inflation does not respond well to rate hikes. --- _Start by reading [Pozsar's Bretton Woods III: The Framework [1/2]](/posts/pozsars-bretton-woods-iii-the-framework-1/2/)_ Now, what actually happened in the three years since Pozsar published the Bretton Woods III framework? (1) Dollar reserve diversification is happening, but gradual: [Foreign central bank Treasury holdings declined from peaks exceeding $7.5 trillion to levels below $7 trillion](https://www.morganstanley.com/insights/articles/us-dollar-declines). This represents steady diversification away from dollar-denominated assets, though not a dramatic collapse. (2) Gold has performed strongly: From roughly $1'900/oz when Pozsar published his dispatches to peaks above $4'000/oz today, gold has appreciated substantially, consistent with increased central bank gold buying and demand for "outside money." (3) Alternative payment systems are developing: Various nations continue building infrastructure for non-dollar trade settlement. While these systems remain in preliminary stages rather than fully operational alternatives to SWIFT, development timelines could speed up following specific triggering events. (4) The dollar itself has remained strong: Perhaps surprisingly given predictions of reserve currency decline, the dollar achieved its best performance against a basket of major currencies since 2015 in 2024. The DXY index (which tracks the dollar against major trading partners) [fell about 11% this year](https://www.morningstar.com/markets/will-dollar-keep-falling#:~:text=In%20the%20first%20half%20of,delivered%20nearly%2040%25%20cumulative%20gains), marking the end of this decade-long rally. (5) Commodity collateral is increasingly important: [Research on commodities as collateral](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355674) shows that under capital controls and collateral constraints, investors import commodities and pledge them as collateral. Higher collateral demands increase commodity prices and affect the inventory-convenience yield relationship. *Related: [Dual Mandate Tensions](https://philippdubach.com/posts/dual-mandate-tensions/)* ## China's Strategic Options in Bretton Woods III One of Pozsar's more provocative arguments concerns China's strategic options. With approximately $3 trillion in foreign exchange reserves heavily weighted toward dollars and Treasuries, China faces the same calculus as any holder of large dollar reserves: what is the risk these could be frozen? Pozsar outlined two theoretical paths for China: (1) Sell Treasuries to purchase commodities directly (especially discounted Russian commodities), thereby converting financial claims into physical resources. (2) Print renminbi to purchase commodities, creating a "eurorenminbi" market parallel to the eurodollar system. The first option provides inflation control for China (securing physical resources) while potentially raising yields in Treasury markets. The second option represents a more fundamental challenge to dollar dominance, the birth of an alternative offshore currency market backed by commodity reserves rather than financial reserves. In practice, we've seen elements of both. China has increased commodity imports from Russia substantially. The internationalization of the renminbi has progressed, though more slowly than some expected, constrained by China's capital controls and the relative underdevelopment of its financial markets compared to dollar markets. *Related: [Pozsar's Bretton Woods III: The Framework [1/2]](https://philippdubach.com/posts/pozsars-bretton-woods-iii-the-framework-1/2/)* ## Durable Insights from the Bretton Woods III Framework Regardless of whether Bretton Woods III emerges exactly as described, several insights from Pozsar's framework appear durable. (1) Central banks control the nominal domain, not the real domain: Monetary policy can influence demand, manage liquidity, and stabilize financial markets. It cannot conjure physical resources, build supply chains, or speed up energy transitions. This distinction matters most during periods of supply-driven inflation, when rate hikes do little to resolve the underlying commodity shortage. (2) Physical infrastructure matters for financial markets: The number of VLCCs, the capacity of the Suez Canal, the efficiency of port facilities, these real-world constraints bind financial flows. Understanding the infrastructure underlying commodity movements provides insight into funding market dynamics. (3) Collateralization is changing: The trend toward commodity-backed finance, warehouse receipt systems, and physical collateral reflects both technological improvements (better monitoring and verification) and strategic shifts (diversification away from pure financial claims). As the [FSB noted in 2023](https://www.fsb.org/uploads/P200223-2.pdf), banks play a vital role in the commodities ecosystem, providing not just credit but clearing services and intermediation between commodity firms and central counterparties. (4) Geopolitical risk affects monetary arrangements: The weaponization of reserve assets, however justified in specific circumstances, changes the risk calculation for all reserve holders. This doesn't mean immediate de-dollarization, but it does mean persistent, gradual reserve diversification. ## Practical Implications for Funding Markets and Monetary Policy So what can we take from this for today: (1) Funding market stresses may be more persistent: If commodity traders require more financing for longer durations due to less efficient trade routes, and if banks face balance sheet constraints from regulatory requirements or QT, term funding premia may remain elevated relative to overnight rates. The FRA-OIS spread, the spread between forward rate agreements and overnight indexed swaps, becomes a window into these dynamics. (2) Cross-currency basis swaps signal more than rate differentials: Persistent deviations from covered interest parity reflect structural factors: global trade reconfiguration, reserve diversification, and the changing geography of dollar funding demand. These aren't temporary anomalies to be arbitraged away but potentially persistent features of the new monetary system. (3) Commodity volatility has monetary policy implications that are difficult to manage: When commodity prices surge due to supply disruptions rather than demand strength, central banks face an ugly tradeoff: tighten policy to control inflation headlines while risking recession, or accommodate the price shock and accept higher inflation. Unlike demand-driven inflation, supply-driven commodity inflation doesn't respond well to rate hikes. (4) Infrastructure bottlenecks matter: Just as G-SIB constraints around year-end affect money market functioning, shipping capacity constraints and logistical bottlenecks affect commodity prices and, through them, inflation. Monitoring the "real plumbing," freight rates, port congestion, pipeline capacity, provides early warning signals for inflation pressures. ## Bretton Woods III as an Analytical Framework Perhaps the most valuable way to engage with Bretton Woods III is not as a prediction to be validated or refuted, but as a framework for thinking about the intersection of geopolitics, commodities, and money. It forces attention to questions that are easy to overlook: (a) How do physical constraints on commodity flows affect financial market plumbing? (b) What risks do reserve holders face that aren't captured in traditional financial risk metrics? (c) Where do central bank powers end and other forms of power, military, diplomatic, infrastructural, begin? (d) How do the "real" and "nominal" domains interact during periods of stress? The current environment shows elements consistent with the Bretton Woods III framework: gradual reserve diversification, persistent commodity volatility, funding market stresses related to term commodity financing, and increasing focus on supply chain resilience over pure efficiency. It also shows elements inconsistent with it: dollar strength through 2024, the slow pace of alternative payment systems, and the resilience of dollar-based financial infrastructure. What seems clear is that the assumptions underlying Bretton Woods II, that dollar reserves are nearly risk-free, that globalized supply chains should be optimized for cost above all else, that central banks can manage most monetary disturbances, are being questioned in ways they weren't five years ago. Whether that questioning leads to a new monetary order or simply a modified version of the current one remains to be seen. But Pozsar's framework provides a useful lens for watching the process unfold, connecting developments in commodity markets, funding markets, and geopolitical arrangements into a coherent story about how the global financial system actually works. _Pozsar's full Money Notes series is available through [his website](https://exunoplures.hu/global-money-notes), and Perry Mehrling's course [Economics of Money and Banking](https://sites.bu.edu/perry/lectures/mb-lectures/) provides excellent background on the "money view" that underpins this analysis._ --- ## Frequently Asked Questions ### What happened to Bretton Woods III predictions three years later? Evidence is mixed. Dollar reserve diversification is happening gradually (Treasury holdings declined from $7.5T to below $7T), gold has risen from $1,900 to over $4,000/oz, and alternative payment systems are developing. However, the dollar itself remained strong through 2024, achieving its best performance since 2015, before declining in 2025. The framework is better understood as a lens for analysis than a precise prediction. ### Is de-dollarization actually happening? Yes, but gradually. Foreign central bank Treasury holdings have declined, gold reserves now exceed Treasury holdings for the first time since 1996, and the share of foreign ownership in the Treasury market has fallen from above 50% to 30%. However, the dollar still dominates 88% of FX volumes and maintains strong transaction dominance in trade invoicing and cross-border finance. ### Why are central banks buying so much gold? Central banks are accumulating gold as outside money that cannot be frozen by another government's decision. After Western nations froze Russian reserves in 2022, the calculus of holding large dollar reserve positions shifted for any country potentially facing future sanctions. Central banks bought over 800 tonnes in 2025 alone, well above the pre-2022 average of 400-500 tonnes, and gold appreciated from roughly $1,900/oz to peaks above $4,000/oz. ### What are the practical implications of commodity volatility for monetary policy? When commodity prices surge due to supply disruptions rather than demand strength, central banks face an ugly tradeoff: tighten policy to control inflation headlines while risking recession, or accommodate the price shock and accept higher inflation. Unlike demand-driven inflation, supply-driven commodity inflation doesn't respond well to rate hikes. Central banks control the nominal domain but not the real domain. ### What does de-dollarization mean for investors? De-dollarization implies persistent reserve diversification into gold and non-dollar assets, elevated funding market stresses as commodity traders require more financing through less efficient trade routes, and wider cross-currency basis swap spreads. Investors should monitor the FRA-OIS spread, freight rates, and central bank gold purchases as leading indicators of how quickly the monetary system is shifting. ### Is the dollar losing its reserve currency status? The dollar's reserve share has declined from 72% in 2001 to roughly 57% in 2025, but it still dominates 88% of FX trading volumes and remains the primary currency for trade invoicing and cross-border finance. The decline is gradual and structural, not a sudden collapse. No single alternative, whether the renminbi, euro, or a BRICS currency, currently offers the depth and liquidity of dollar markets. --- Canonical: https://philippdubach.com/posts/pozsars-bretton-woods-iii-three-years-later-2/2/ Content-Signal: search=yes, ai-input=yes, ai-train=yes This file is the canonical machine-readable variant of https://philippdubach.com/posts/pozsars-bretton-woods-iii-three-years-later-2/2/. Author: Philipp D. Dubach (https://philippdubach.com/).