Trump's Campaign to Change the Global Economic System Threatens the Dollar's Throne

SadaNews – The pursuit of U.S. President Donald Trump to redesign the global economic system in what he believes serves the United States is causing a shakeup in the role of the U.S. dollar as the world's reserve currency, a status unmatched by any other currency, which has been one of the foundations of his country's superiority since World War II.

This situation reflects a reality in which the U.S. dollar is used in about 9 out of every 10 foreign exchange transactions and roughly half of international merchandise trade, as it constitutes about 60% of global government reserves.

This dominance allows Washington to finance a massive fiscal deficit and for consumers in the United States to spend more than they earn, all backed by foreign investors racing to acquire assets denominated in the green currency adorned with the "In God We Trust" slogan.

Trust in the U.S. Dollar

However, trust in the U.S. dollar is declining. In 2022, restrictions by the administration of former President Joe Biden on Russia's access to the currency after its war on Ukraine sparked the first round of currency diversification, amid the widespread idea that if Washington excluded the 11th largest economy globally, deeply involved in the global oil markets, who is safe?

The wave of "big inflation" and the rapidly deteriorating public finances since then have fueled doubts about the exceptionalism of the American economy.

Recently, the haphazard introduction and also haphazard retreat from the tariff campaign launched by Trump last April led to a rare drop in the value of both the U.S. dollar and U.S. Treasury bonds. The U.S. dollar index fell by over 10% during the first six months of this year, marking the worst performance for the first half of the year since 1973.

It seems as if the genie has come out of the bottle, as it has become difficult to curb discussions about "selling American assets." Banks and brokers are tracking increased demand for currency products beyond the U.S. dollar, and some of Asia's wealthiest families have reduced their exposure to U.S. assets, stating that Trump’s tariffs have made the country less predictable.

Competing geopolitical powers within the BRICS group (Brazil, Russia, India, China, and South Africa) continue their efforts toward a new cross-border payment system. Even long-time allies like Europe see an opportunity for the erosion of U.S. dollar dominance.

Rivals of the U.S. Dollar

Not everyone carries this degree of pessimism. Jamie Dimon of JPMorgan Chase & Co. stated last May that the United States remains "the most prosperous and innovative nation on the planet," and he is not worried about short-term fluctuations in the U.S. dollar.

Treasury Secretary Scott Piesen has tried to convince investors that the strong dollar policy is still in place, while Trump has threatened to impose 100% tariffs on anyone daring to challenge it. However, despite the tough rhetoric, the reality remains that the major strengths of the green currency lie relatively in the absence of a single competitor capable of usurping its position at the top of the global monetary system.

There have been rumors that this is the time for the euro to surpass the dollar globally, allowing the single European currency to play a larger role, but history shows that the European bloc struggles to act in a coordinated manner, and its institutions suffer from a fragmentation that renders them incapable of creating strong enough markets to compete with their American counterparts.

The Chinese central bank governor speaks positively about his country’s currency as an option for those looking to distance themselves from the U.S. dollar, but it is hard to imagine that the Chinese yuan will succeed in taking advantage of this shift given the ongoing restrictions limiting the free flow of assets due to barriers to capital movement in China.

Alternatives to the U.S. Dollar

Central banks and investors have rushed to pile up the ultimate safe-haven asset, gold, but it is burdensome to hold, yields no return, and is not easily used in trade or financial transactions, unlike the U.S. dollar.

Speculations about alternatives to the U.S. dollar extend to Bitcoin and other cryptocurrencies, yet few outside El Salvador (which adopted the cryptocurrency as legal tender in 2021) are willing to switch to anything unsupported by a government.

Other financial innovations such as stablecoins, which are cryptocurrencies designed to replace traditional cash, may reinforce the dollar's priority rather than displace it, as they peg their value to the green currency.

With no viable alternative to the U.S. dollar serving as the world’s primary currency, the likely change is towards a multi-currency world.

The dollar will remain dominant, but other currencies will play bigger roles. While this is less revolutionary than the predictions of some pessimists about a complete collapse of the global monetary system, the resulting competition between currencies will have profound effects on American soft and hard geopolitical influence. The truth is that no one is really prepared—especially Americans—for what a currency competition frenzy will mean in practical terms.

The Strong U.S. Dollar

The United States will have to give up some of the advantages of a strong dollar system, most notably lower interest rates as foreign investor demand for dollar-denominated bonds declines.

Economist Barry Eichengreen from the University of California, Berkeley, who has extensively written about the U.S. dollar, estimated that under a scenario where the United States withdraws from the global stage, the U.S. dollar's share of the reserves of countries relying on its safe umbrella could drop by about 30 percentage points. U.S. long-term interest rates could rise by as much as 0.8 percentage points, according to his estimates.

At the level of American banks, they will have to pay a higher cost to raise funds and impose higher mortgage rates as a result. High home loan interest rates tend to slow down the economy as they leave consumers with less income to spend on vacations and home improvements, etc.

Government Debt Costs

The federal government will also feel pressure as it funds its annual deficit, which reached just under two trillion dollars, through Treasury bonds. In a world where assets denominated in euros or Japanese yen compete more aggressively to attract investor attention, this means higher borrowing costs for the U.S. government.

We are already seeing signs of this, as the yields on 30-year Treasury bonds have doubled since the beginning of 2022 and exceeded 5% at one point in May. This means that America will pay higher costs for new borrowing and more to rollover its existing debt as well. By some measures, annual payments on U.S. government debt today are larger than what the country spends on national defense.

The internationalization of the U.S. dollar has long provided cover for lawmakers in Washington to avoid choosing between spending on defense or enhancing the civilian economy or tax cuts. Although doubts about the U.S. dollar are increasing amid inflationary fiscal deficits, lawmakers do not yet seem willing to adopt policies of austerity in spending.

Elon Musk promised to save a trillion dollars through what he calls government efficiency management, but the cuts so far have provided less than 200 billion dollars.

At the same time, a legislative victory for Trump, the so-called big beautiful united bill, could add up to 3 trillion dollars to the deficit over the next decade, according to estimates from the Congressional Budget Office.

In a world where investors continue to move away from the green currency, markets may eventually impose difficult trade-offs to reduce the deficit, similar to imposing restrictions on social safety nets and public research and development spending, which have long spurred innovation in the private sector across areas including tech giants and major pharmaceutical firms.

The Weak U.S. Dollar

This could impact America's geopolitical standing due to a less dominant U.S. dollar. With a weaker currency, military bases abroad will be more expensive to maintain.

As the use of the U.S. dollar in global transactions declines, economic sanctions will become less effective on adversaries. Additionally, it will become more difficult to police the financial system against malign activities such as funding terrorism or money laundering, as flows outside the dollar-based networks will not be visible to U.S. policymakers.

Josh Lipsky, senior director at the Atlantic Council's Geoeconomics Center in Washington and a former advisor at the International Monetary Fund, states: "We do not appreciate how good we have it. Having the world's reserve asset means cheaper credit for Americans and the federal government, and it means greater transparency for U.S. policymakers in the financial system, enabling the management of state affairs in line with U.S. foreign policy goals. This is the reality of the risk."

U.S. Treasury Secretaries, who are responsible for protecting the U.S. dollar and American monetary policy, have long said it is up to the nation itself to guard the treasure of the world's reserve asset.

Whether it was Bob Rubin, Hank Paulson, or Janet Yellen, these leaders have asserted that a strong economy backed by independent institutions and the rule of law will protect the dollar's standing.

Yet, the Trump administration has sent mixed signals in this context. Piesen largely adhered to what his predecessors said, but Stephen Miran, head of the White House Council of Economic Advisers and Trump’s latest nominee for the Board of Governors of the Federal Reserve, described the dollar's situation as a "burden."

Trust in the U.S. Dollar

The unfavorable conditions for the U.S. dollar are exacerbated by Trump's efforts to push the executive branch to intervene in independent bodies such as regulatory agencies and even the Federal Reserve, in addition to his tendency to engage in legal disputes and Washington's disregard for the standard federal debt.

Trust is the cornerstone of the world's choice of the dollar as "king" while Trump undermines that credibility. Lipsky states: "For the first time, the future status of the dollar may be determined by how other currencies develop. And these currencies will develop faster if people seek them out, and that is the lesson we learned from capitalism."

The global economy today is more finance-centered and interconnected than it was during the last major structural shift in global monetary power nearly 80 years ago when the U.S. dollar overtook the pound sterling. In fact, the U.S. dollar's status has faced crucial tests before but managed to endure.

Former U.S. President Richard Nixon unilaterally abandoned the dollar's peg to gold in 1971 and imposed a 10% import tariff after countries, including France, sought to exchange dollars for bullion, a move that threatened the monetary system agreed upon at Bretton Woods after World War II.

Moreover, the global financial crisis caused by the U.S. in the early 2000s raised questions, especially in China, about whether the United States still deserves its role as a cornerstone of the global monetary system.

The Decline of the U.S. Dollar

Previous eras have known a mixed use of currencies, but they typically revolved around gold or silver. Never before have multiple fiat currencies competed for dominance.

This reality raises concerns for some about what lies ahead. An era characterized by multiple currencies could lead to instability, with investors shifting from one currency to another depending on financial conditions, complicating the challenge facing companies already struggling with how to restructure supply chains in an age of rising tariff barriers.

The U.S. Treasury Secretary, responsible for managing U.S. monetary policy, responds to skeptics of the U.S. dollar by stating in an interview with Bloomberg TV on July 3: "Since World War II, the decline of the U.S. dollar as a global reserve currency has been predicted. Again, those who hold this skepticism will be wrong."

There is no doubt that Piesen is right; the U.S. dollar will not disappear soon from the safes of central banks nor as a medium of global finance. But it will face greater competition in a multipolar world, and this will have unpredictable repercussions both domestically and abroad.