Source: The post Trump’s Return Threatens US Dollar Global Dominance has been created, based on the article “King Dollar’s shaky crown” published in “Businessline” on 1 May and 2 May 2025 respectively. Trump’s Return Threatens US Dollar Global Dominance.
UPSC Syllabus Topic: GS Paper2- International Relations
Context: Donald Trump’s return to power in January 2025 has disrupted global financial stability and raised doubts about the future of the US dollar. Two recent books — King Dollar by Paul Blustein and Our Dollar, Your Problem by Kenneth Rogoff — provide important insights into the dollar’s role and its emerging challenges.
The Dollar’s Global Primacy
- Key Global Currency Functions: The US dollar remains the top reserve currency, investment vehicle, and trade invoicing medium. It supports global trade due to its liquidity and reliability.
- Market Presence and Network Effects: According to the Bank for International Settlements (BIS), daily foreign exchange turnover reached $7.5 trillion in April 2022, with the dollar involved in 88% of trades. In 1989, the figure was just $500 billion. This vast usage reinforces the dollar’s dominance through powerful network effects.
- Limited Global Competition: Despite efforts like China’s e-CNY, the renminbi lacks the exchange-rate flexibility and financial reforms needed to challenge the dollar. Rogoff stresses that without these changes, the renminbi will not become a viable alternative.
Trump’s Disruptive Economic Approach
- Departure from Postwar Strategy: Unlike past US leaders who used multilateralism to maintain order, Trump’s grievance-led unilateralism represents a major shift. His policies go beyond what even Blustein and Rogoff had anticipated in December 2024.
- Erosion of Domestic and Global Trust: Trump has withdrawn from international agreements, cut foreign aid, and followed a transactional foreign policy. Domestically, he has pressured the Fed, weakened the federal workforce, and attacked legal and academic institutions.
- Escalating Trade Conflicts: Trump’s “Liberation Day” tariffs caused a drop in the dollar and a spike in Treasury yields, indicating investor flight from US bonds. A brief tariff delay calmed markets, but further attacks on Fed Chair Powell triggered renewed declines.
A Shifting Global Financial Order
- Capital Market Fragmentation: Falling global trust in US leadership could lead to currency fragmentation. Economic models suggest that multiple currencies could share global dominance.
- Strategic Misjudgment of Dollar’s Role: Trump’s adviser Stephen Miran claims the dollar has harmed US manufacturing and worker competitiveness. However, Blustein counters that the “exorbitant cost” argument ignores the dollar’s geopolitical benefits.
- Possible Turning Point:April’s events may signal the start of dollar decline. While no clear successor exists, continued instability may weaken the global trade and financial order.
Risks to Dollar Dominance
- Institutional and Fiscal Instability: Congressional Republicans, supported by Trump, are expanding deficits by bypassing reconciliation and depending on volatile tariff revenues. This signals deepening institutional decay.
- Breakdown of Regulatory Cooperation: US reluctance to cooperate with the Basel Committee and Financial Stability Board risks undermining cross-border regulatory coordination and critical tools like dollar swap lines.
- Technology and Currency Innovation Gaps: Trump’s CBDC ban and crypto deregulation stance isolate the US from global payment innovation, threatening future efficiency and interoperability.
Question for practice:
Evaluate how Donald Trump’s return to power in 2025 has affected the global dominance of the US dollar.
