Amid the financial market fallout which followed Donald Trump’s “Liberation Day” tariff announcement on 2 April, the value of the US dollar has plunged.
But while United States stock markets have largely recovered since then, the greenback – which typically gains in value during periods of financial turbulence – has continued its downward trajectory.
This is because the severe nature of Trump’s international trade policies has raised the possibility of a US recession later this year, denting demand for America’s currency.
Trump’s tariff blitz is also forcing investors to confront the possibility that the dominance of the dollar might be fading, or even coming to an end.
“The world is facing a dollar confidence crisis as the repercussions of ‘Liberation Day’ continue to reverberate,” Deutsche Bank analysts wrote in a recent note to clients.
For close to a century, the US has been the world’s investment “safe haven”. Dozens of countries still maintain a peg to the greenback, meaning their currency prices are correlated.
But investors are now starting to worry about the long-term safety of the dollar, and the consequences could be dramatic.
What has happened to the dollar?
On 2 April, the Trump administration unveiled punishing tariffs on imports from dozens of countries around the world, denting confidence in the world’s largest economy and causing a selloff of US financial assets.
More than $5 trillion was erased from the value of the benchmark S&P 500 index of shares in the three days after “Liberation Day”.
US Treasuries – long considered the archetypical safe investment – also saw selloffs, lowering their price and sending debt costs for the US government sharply higher.
Faced with a revolt in the financial markets, Trump announced a 90-day pause on tariffs, except for exports from China, on 9 April. But investors remain wary about holding dollar-linked assets.
So far in April, the dollar has fallen by 3% relative to a basket of other currencies to reach its lowest level in three years, compounding an almost 10% slide since the start of 2025.
“Investors have been selling US assets, and the value of the dollar has fallen,” Karsten Junius, chief economist at Bank J Safra Sarasin told Al Jazeera.
“But the dollar hasn’t gone up as much [as US equity prices since 9 April] because there’s been a loss of trust in US economic policymaking,” he added.
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(Al Jazeera)Why is the US dollar so important?
For the past 80 years, the US dollar has held the status of primary reserve currency – foreign currencies held in significant quantities by the world’s monetary authorities.
In large part, the dollar emerged as the commanding global currency due to the first and second world wars. As Europe and Japan descended into chaos, the US was making money.
Then, in 1971, when Richard Nixon de-linked gold from the value of the US dollar, the greenback’s role in supporting the global financial system grew. So did its demand.
Following the “Nixon shock”, most countries abandoned gold convertibility but didn’t adopt market-determined exchange rates. Instead, they pegged their currencies to the dollar.
Owing to its dominance in trade and finance, the dollar became the standard currency anchor. In the 1980s, for instance, many Gulf countries began pegging their currencies to the greenback.
Its influence didn’t stop there. While the US only accounts for one-quarter of global gross domestic product (GDP), 54% of world exports were denominated in dollars in 2023, according to the Atlantic Council.
Its dominance in finance is even greater. About 60% of all bank deposits are denominated in dollars, while nearly 70% of international bonds are quoted in the US currency.
Meanwhile, 57% of the world’s foreign currency reserves – assets held by central banks around the world – are held in dollars, according to the IMF.
But the dollar’s reserve status is largely supported by confidence in the US economy, its financial markets and its legal system.
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Trump is changing that. “He doesn’t care about international norms,” said Junius, and “investors are beginning to realise they’re over-exposed to US assets.”
Indeed, foreigners own $19 trillion of US equities, $7 trillion of US Treasuries and $5 trillion of US corporate bonds, according to Apollo Asset Management. That’s roughly 30% of global GDP.
If even some of these investors start to trim their positions, the dollar’s value could come under sustained pressure.
What are the consequences of a lower-value dollar?
Many in the Trump team argue that the costs of the US dollar’s reserve status outweigh the benefits by making it overvalued – raising the cost of US exports.
Stephen Miran, chair of Trump’s Council of Economic Advisers, recently said that high dollar valuations place “undue burdens on our firms and workers, making their products and labour uncompetitive on the global stage”.
“The dollar’s overvaluation has been one factor contributing to the US’s loss of competitiveness over the years, and… tariffs are a reaction to this unpleasant reality,” he added.
At first blush, a lower dollar would make US goods cheaper to overseas buyers, supporting domestic manufacturing and helping to reduce the country’s trade deficits.
“It will also make imports more expensive, hurting consumers,” Colombia’s former finance minister Jose Antonio Ocampo told Al Jazeera. “The general view is that US inflation will increase.
“Elsewhere, the price of gold has also gone up,” Ocampo said. “It seems there’s a growing preference among central banks to hold gold instead of US Treasuries.”
Ocampo said that he also thinks that confidence in the dollar has taken a hit as a result of Trump’s tariff announcements and that its selloff has been offset by gains for other safe-haven currencies.
On 11 April, the euro hit a three-year high above $1.14 and has gained more than 5% on the dollar since the start of the month.
Could another currency take the dollar’s place as world dominator?
“For now, I think the dollar will remain the dominant global currency,” said Ocampo.
But he also said that by weakening the US’s economic foundations, Trump is undermining global dollar dominance. For his part, Ocampo mentioned two currencies that stand to benefit.
“We’ve seen inflows into the Swiss franc recently. But the euro is the real alternative to the dollar,” he said.
The euro currently makes up 20% of international foreign exchange reserves – one-third of the dollar amount.
“If the EU can agree on closer fiscal union and, crucially, more integration across its financial markets, it will be the currency that could take on the mantle,” Ocampo said.
