Trump’s Return Threatens US Dollar Global Dominance

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

1. 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.
2. 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.
3. 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

1. 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.
2. Erosion of Domestic and Global Trust: Trump has withdrawn from international agreements, cut foreign aid, and followed a transactional foreign policy.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.
3. 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

1. Capital Market Fragmentation: Falling global trust in US leadership could lead to currency fragmentation. Economic models suggest that multiple currencies could share global dominance.
2. 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.
3. 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

1. 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.
2. 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.
3. 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.