Protectionist trade policies are weakening the US dollar’s position as the world’s dominant reserve currency, while de-dollarisation efforts gather momentum amid growing calls for an alternative global monetary system.
The US Dollar Index fell by more than 11 percent in the first six months of the year to 97, marking its worst first-half performance since 1973. The index has dropped 7 percent since US President Donald Trump announced sweeping reciprocal tariffs on April 2nd.
The fragmentation of global trade and geopolitical turmoil are prompting central banks and investors to move away from the US dollar and opt for alternatives such as gold, the euro and Chinese yuan.
Since the start of the year, the dollar has declined by more than 12 percent against the euro, driven by Trump’s policies that have narrowed the US trade deficit but also raised concerns over rising borrowing costs.
China has kept the yuan tightly pegged to the dollar, allowing Chinese export prices to remain competitive in key markets such as Europe.
The BRICS bloc — Brazil, Russia, India, China, and South Africa — has accelerated efforts to settle transactions without using the dollar. Trump said Tuesday that the bloc is trying to destroy the US currency and vowed to stop it.
Trump’s failure to reduce public spending
A survey by the Official Monetary and Financial Institutions Forum found that 80 percent of central banks are concerned about the political developments in the US, while a net 16 percent of survey participants plan to increase their euro holdings over the next 12–24 months, and 32 percent of central banks aim to increase their gold reserves over the same period.
Along with his fiscal and foreign policies, are among the key reasons investors are leaving the US market.
European Central Bank President Christine Lagarde said in May that the euro could play a greater global role as bilateral relationships replace multilateral cooperation, shaking the foundations of the current financial order.
People’s Bank of China Governor Pan Gongsheng said in June that US instability could increase the risk of a global financial crisis, underscoring the vulnerabilities of a system dominated by a single currency.
Despite the challenges, US has no plans to relinquish the dollar’s dominance. A bill proposing sanctions against countries with “unfair” foreign taxes on the US; has been presented to Congress, and if passed, it would allow the US to impose targeted financial sanctions.
United States’ total debt currently stands at $37 trillion and is expected to exceed $47 trillion by 2030.
Interest payments make up around 20 percent of federal tax revenues, fuelling concerns over the long-term position of the US bond market and the US dollar.
In a surprising turn of events, billionaire Elon Musk — once a Trump adviser before a recent falling out with the president — harshly criticised the latest budget bill, which targets fiscal policies based on excessive borrowing.
New regulations are being introduced in the US to bring dollar-backed stable coins — a type of cryptocurrency — to the masses worldwide, which could be seen as a faster and more pragmatic tool to manage US debt.
Trump’s trade policies
Trump’s trade policies have sent conflicting signals, as they attempt to defend a strong dollar while benefiting from a weaker one.
However, the lack of a viable alternative remains the biggest obstacle to de-dollarisation. Robin Brooks of the Brookings Institution said the Chinese yuan’s tight state controls and the eurozone’s debt constraints limit their ability to replace the dollar.
A recent analysis by Oxford Economics showed that a weaker dollar provides relief for developing countries with fragile balance sheets, including Hungary, Egypt, Chile, Malaysia and Colombia.
The research found that undervalued local currency bonds and foreign exchange markets in Türkiye, Chile and Egypt remain attractive, and demand could rise further if the dollar continues to weaken.
While the yuan’s gradual appreciation and state control limit its appeal as a reserve currency, the dollar’s decline is expected to support emerging market currencies and bonds, making emerging market assets and gold potential safe havens, Oxford Economics said.
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Source: TRT