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amidst the global repercussions of Donald Trump’s “liberation day” tariff declaration, it seems no one is untouched. Share prices are plummeting, there’s a sell-off in bonds, and currency turmoil has wiped out trillions in wealth within days.
On Friday, the dollar dropped by over 1% against a basket of currencies, hitting a three-year low and compounding an almost 10% decline since the year began. Within a week, it fell by approximately 3 cents compared to the pound and 4 cents against the euro.
Even following the president’s partial reversal – which halted tariffs at 10% on all US imports except those from China for 90 days – the markets shifted from a relief rally to a new downturn, as investors began to ponder a previously unthinkable notion: might the US dollar be losing its previously untouchable safe haven status?
“The damage has been inflicted,” stated George Saravelos, head of foreign exchange research at Deutsche Bank. “The market is reevaluating the structural appeal of the dollar as the world’s primary reserve currency and is moving through a rapid process of de-dollarisation.”
Unlike conventional market sell-offs, during which the dollar and Treasury bonds typically gain value as safe havens, the Trump-induced crash has witnessed US equities, government bonds, and the dollar declining simultaneously.
The dollar has maintained its status as the world’s primary reserve currency for the past 80 years; it serves as a store of value worldwide, lubricates the financial system, and functions as the main medium for trade.
The prevailing belief is that a currency backed by a government at the center of the world’s foremost economy, possessing the deepest capital markets, mightiest military, and a political framework that adheres to the rule of law represents optimal stability.
However, Trump is disrupting this norm by imposing punitive tariffs on both traditional allies and foes of the US.
Raghuram Rajan, former governor of the Reserve Bank of India and a past chief economist at the International Monetary Fund, noted that the currency crisis is a result of investor anxiety surrounding the US economy and Trump’s unpredictable policy shifts.
“Concerns are mounting over how erratic and volatile US policy has become, coupled with fears that persistent high tariffs may push the US towards a recession,” he remarked, emphasizing the fluctuating nature of tariff policy.
The abrupt decline in confidence has been glaring within the US Treasury market, which is typically viewed as the world’s most crucial market as investors traditionally regard it as the “risk-free” standard for pricing all other financial assets.
Witnessing the most significant weekly shift since 1982, the yield – essentially the interest rate – on 30-year US government bonds surged from about 4.4% to 4.8%. There’s been a similar rise in yields on 10-year bonds.
Donald Trump explains decision to pause US tariffs for 90 days – video
Investors indicate there’s a lot at stake. While a discernible confidence crisis emerges, the turbulence affecting the US dollar and Treasury bonds also signifies the anticipated economic repercussions triggered by Trump’s policies; including an over 50% chance of a US recession and an increasing possibility of the Federal Reserve reducing interest rates.
Amid the widespread market downturn – which has seen over $5 trillion (£3.8 trillion) erased from US share values – the bond sell-off also indicates hedge funds unloading Treasuries to mitigate risky bets, with investors scrambling for liquidity.
“I believe Trump’s trade stances are misguided and reckless. He risks harming the US economy and has triggered a needless crisis,” remarked Mark Sobel, a former senior US Treasury official now chair of the Official Monetary and Financial Institutions Forum, a think tank for central banking.
“My fundamental belief is that the dollar will continue to be the dominant global currency for the foreseeable future, as no legitimate alternatives exist. However, I perceive that Trump, by undermining America’s economic and institutional foundations through a lack of trust, is weakening the very basis of dollar supremacy.
“His actions over the past week will certainly hasten the diminishment of dollar dominance and will lead to heightened market volatility globally.”
Data compiled by the IMF show the US dollar as the preferred reserve currency for nations worldwide, representing nearly 60% of global foreign exchange reserves. The euro trails significantly with about 20%, with the Japanese yen at nearly 6%. The pound, which was the global reserve currency before the US’s ascent following World War II, constitutes roughly 5%.
Sobel noted a recent increase in the adoption of the Canadian and Australian dollars, as well as Swiss francs and the yen. The euro has made limited progress, while the Chinese yuan – supported by a communist regime and an economy relatively insulated from the global market – still lacks widespread appeal.
However, some members of Trump’s administration regard the dollar’s status as the international reserve currency unfavorably, viewing it as a sign of the world taking advantage of the US.
The president has long desired a weaker dollar, believing it would make US products less expensive for foreign buyers, thereby boosting domestic manufacturing and helping reduce the country’s trade deficits.
Stephen Miran, chair of the Council of Economic Advisers, has proposed a plan reminiscent of the 1985 Plaza Accord – during which the US collaborated with Japan, Britain, West Germany, and France to devalue the dollar – potentially termed the “Mar-a-Lago Accord” after Trump’s Florida residence.
Typically, trade deficits – where imports outstrip exports – self-correct over time, as they exert downward pressure on a nation’s currency (due to demand for foreign currency exceeding that of domestic currency). Yet, the US’s “exorbitant privilege” stemming from its global reserve currency status – ensuring persistent dollar demand – has allowed the country to sustain a continuous trade deficit since the 1970s.
Many economists find little issue with this; provided it results in consumer benefits from cheaper imported goods.
Concerns are also rising among investors regarding the possibility that the US may pursue a strategy demanding other nations to compensate for the “exorbitant privilege” of utilizing the dollar as the reserve currency. This, however, would inflict severe repercussions on the global economy while further eroding confidence in the dollar.
“The world should be prepared for this,” asserted Karsten Junius, chief economist at J Safra Sarasin Sustainable Asset Management. “We see it as probable that the US will attempt to merge preferential tariff treatment and access to its market and financial framework with countries that align with the US in isolating China.
“Nations would be compelled to choose sides, which would be particularly challenging for European and East Asian countries that maintain equally significant ties with both the US and China.”
In light of the dollar’s uncertain future, the EU is particularly exploring contingency measures. José Luis Escrivá, the governor of the Bank of Spain and a member of the European Central Bank’s governing council, expressed to the Financial Times that the bloc could emerge as a more appealing alternative.
“We can provide a very extensive economic zone and a robust currency, benefiting from the stability and predictability that arise from sound economic policies and adherence to the rule of law.”
Pascal Lamy, former EU trade commissioner and ex-head of the World Trade Organization, further indicated that Trump’s trade war could motivate other nations to collaborate more closely.
“The EU is the obvious candidate to unite various others. It won’t be effective if China or even India does it,” he stated.
“This is an American crisis; it is not a global crisis. The US accounts for 13% of world imports, but there’s no reason for the remaining 87% to be affected by these misguided economic policies.”
