For nearly a century, the U.S. dollar has reigned supreme in the global economy, dominating trade and finance, and providing stability to international markets. But the events of recent days have thrown that premise into the lurch.
Normally, when the stock market is in distress, investors seek refuge in U.S. treasuries, pushing the value of the dollar upward. Since President Donald Trump announced his “Liberation Day” tariffs, the opposite has occurred. Instead of flocking to the dollar, global investors appeared to run from it.
The dollar hit a three-year low last Friday and continued its slide over the weekend. One dollar, which was worth €0.97 when Mr. Trump took over, is now worth €0.88.
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The economic turmoil caused by President Donald Trump’s tariffs has caused investors to flee from U.S. Treasury bonds – something that didn’t happen even in recent economic crises. That’s a bad sign for the dollar’s global dominance.
Analysts have called this a moment of rapid de-dollarization as investors reassess the trustworthiness of a currency that had long been considered the most reliable in the world. The aftermath will determine if this is a brief stumble for dollar dominance or evidence of a seismic shift in the global financial order.
“It is too early to call if we are seeing the demise of the dollar, but the dollar has certainly been put on a ‘watch list,’” says Kevin Gallagher, director of the Global Development Policy Center at Boston University. For the rest of the world, “The U.S. is no longer innocent until proven guilty, but the opposite.”
Why has the dollar plunged?
Mr. Trump’s sweeping tariffs rattled global markets over the past two weeks, with worries of a trade war and recession running high.
During the financial crisis of 2008, investors around the world bought more Treasury bonds, confident that despite the crash, this was the safest place in the world for their money. That is how things usually go: The bond market moves in the opposite direction as stocks.
This time, as the stock market took a nosedive, an alarming trend emerged. Investors were dumping their U.S. government bonds. The yield on the 10-year Treasury jumped from 4% to 4.5% in a week, a huge jump for the bond market that indicates a major sell-off. Investors were putting their money into euros, yen, pounds, and gold instead of into dollars.
“The world is treating America like a developing country,” wrote Noah Smith, a leading economic blogger, in a post equating the current moment to the capital flight seen during times of crisis in emerging economies.
Many of those watching say it was the bond markets that made President Trump reverse course, placing a 90-day pause on tariffs for all countries besides China. Yet the damage to the world’s confidence in the dollar may already have been done.
What has made the dollar so dominant?
The dollar has been a central pillar of the global financial system since 1944, when the Bretton Woods agreements pegged major currencies to the greenback, which was tied to gold.
Its dominance persevered after the end of the gold standard in 1971, thanks to the size and strength of the American economy, the dollar’s ubiquity in global trade and central bank reserves around the world, and widespread trust in American democratic institutions and rule of law.
Most commodities, including oil, are priced in dollars. Over half of all international transactions take place in dollars, and nearly 60% of foreign currency reserves are held in dollars, which is triple the amount in euros. That is not due to any loyalty to the United States – China is one of the largest holders of U.S. bonds – but due to the perceived safety of its debt.
For years there have been rumblings about de-dollarization, especially from countries such as China, Russia, and Brazil that would benefit from reducing American dominance. But these calls never gained much traction without a convincing alternative to the dollar.
What does this mean going forward?
America’s role in the global economy will not be overturned overnight. The U.S. market remains the largest in the world, with the deepest capital pockets.
Still, the world’s reliance on the dollar stands on a prerequisite trust in the stability of the American currency and the nation’s global leadership. Without that trust, dollar hegemony should not be taken for granted, say analysts.
At stake is the “exorbitant privilege” of dollar dominance, a term coined in 1965 by Valéry Giscard d’Estaing, the French minister of finance at the time. The U.S. can buy cheaper goods abroad, impose sanctions with greater force, and issue bonds at a lower cost, helping it service its massive debt.
While Mr. Trump has said he wants to maintain dollar dominance, members of his government have cast doubt on its desirability for the American economy.
“You could argue that the reserve currency status is a massive subsidy to American consumers, but a massive tax on American producers,” said Vice President JD Vance, then an Ohio senator, in a Senate hearing with Federal Reserve Chair Jerome Powell in 2023, suggesting that a strong dollar and cheap imports have helped hollow out U.S. industry.
Where that leaves the global economy is unclear. One characteristic of the current administration is “a kind of disdain or lack of consideration for the rest of the world,” says David Lubin, a senior research fellow at Chatham House, a think tank in London. It stems from Mr. Trump’s confidence that the U.S. can “go it alone.”
“I haven’t seen any coherent framework for what kind of monetary system exists after you undermine the dollar’s role within it,” he adds.
