In this month’s commentary our Chief Economist, Colin Warren, explores the ways in which the policies of the Trump administration could undermine the safe-haven, reserve status of the US dollar and US Treasury bonds.
The long-standing dominance of the US dollar as the world’s primary reserve currency and the linchpin of global finance has earned it the moniker ‘King Dollar.’ Its status has long been underpinned by the depth and liquidity of US financial markets and by a broad perception of American economic and institutional stability.
However, since President Donald Trump’s announcement on April 2nd of sweeping tariffs, the performance of both the US dollar and US Treasury bonds has defied expectations. Rather than strengthening — as they typically do during times of policy uncertainty and equity market volatility — both have come under pressure, prompting some observers to question whether the traditional ‘safe haven’ status of US assets is starting to wane. In this month’s commentary we explore whether the policies of the Trump administration are undermining ‘King Dollar.’
Structural Supremacy vs Political Risk
Despite the extraordinary moves in markets in recent weeks, the US dollar and US Government bonds are unlikely to lose their dominant reserve asset status anytime soon. The size of the US economy and its unparalleled, deep financial markets — especially for US Treasury bonds — mean that there is a lack of viable alternatives: the eurozone’s bond market is fragmented; China has strict capital controls, and the Renminbi is not fully convertible, meaning money cannot move freely in and out of the country.
However, the status of “King Dollar” also rests on less ‘permanent’ factors, such as policy stability, institutional credibility, and a respect for the rule of law which are more easily undermined. Unfortunately, there are signs that this is happening under the second Trump administration.
Erratic Trade Policy
The most obvious threat to confidence in the US dollar has come from Trump’s erratic policy on trade. One of the things that investors consider when looking for a safe asset is predictable and competent policy in the entity that is issuing it. President Trump’s “on-again, off-again” policy on tariffs has been anything but predictable, and has pushed measures of policy uncertainty to unprecedented highs[1]. The legality of the tariffs has also been called into question[2]. Such behaviour projects an image of the US Government as an unreliable and transactional partner. Moreover, the nonsensical formula that the administration used to calculate the so-called reciprocal tariff rates announced on 2nd April has further fuelled doubts about the administration’s economic competence[3].
Furthermore, central banks generally manage their foreign exchange reserves to reflect their country's trade patterns and financial obligations. With the Trump administration seeking to create a more protectionist, self-sufficient US economy that buys fewer goods from overseas, a reduction in trade could incentivise foreign central banks to diversify away from dollar holdings. The US dollar is still the world’s main reserve currency, accounting for around 58% of global foreign exchange reserves, but the share has fallen back from levels of over 70% in 2000[4]. Trump’s isolationist and aggressive trade policies could accentuate this trend.
Indeed, there are concerns that a bellicose Trump administration could double down on weaponising the dollar, further undermining its appeal as a safe asset. In the past, the US has sought to leverage the dollar's dominance in international transactions and the global financial system to exert economic pressure on other nations. This has happened via a variety of measures including sanctions, the freezing of assets, and cutting off access to the SWIFT payments network. Such fears amongst countries worried about geopolitical risk have been a driver of increased demand for gold in recent years, as wary central banks seek to diversify away from the US dollar.
Mar-a-Lago Accord?
The suspicion that the Trump administration would be happy to oversee a weaker US dollar as part of plans to boost US manufacturing jobs, make US exports more competitive, and rein in the country’s gaping US trade deficit could also undermine faith in the greenback.
In an echo of the 1985 Plaza Accord, there is talk that the Trump administration could force its trading partners into a ‘Mar-a-Lago Accord’ whereby they appreciate their currencies against the US dollar. However, unlike the Plaza Accord, which saw France, Japan, West Germany and the UK voluntarily agree with the US to jointly weaken the dollar, a Mar-a-Lago accord (an idea developed by one of Trump’s economic advisers, Stephen Miran, prior to joining the administration) would be unilateral and coercive. Under the threat of sustained tariffs, and in exchange for ongoing US security guarantees, countries would be forced to appreciate their currencies against the dollar and swap their US Treasury holdings for so-called ‘century bonds’ which pay no interest.
It should be said that President Trump has not formally endorsed a "Mar-a-Lago Accord" as an official policy initiative and its feasibility remains highly questionable. However, the administration’s recent actions might be seen as consistent with such a plan. And the mere hint of a possible debt restructuring could make investors more wary of holding US Treasuries, and undermine the reserve status of the US dollar.
Faith in Institutions and an Independent Fed
The erosion of institutional independence and credibility under the Trump administration also threatens to undermine the appeal of the US dollar and US Treasuries. For investors, this is a particularly pertinent issue regarding the US central bank, the Federal Reserve (the Fed). The independence of the Fed gives investors confidence that financial stability will be maintained, inflation will be kept under control, and monetary policy decisions will be shielded from political short-termism.
However, whereas politicians normally respect the independence of their central bank, President Trump has repeatedly criticised Fed officials and called for lower interest rates[5]. In recent weeks President Trump has challenged legal precedent and dismissed several heads of independent agencies, including those at the National Labour Relations Board (NLRB) and the Federal Trade Commission (FTC).
These developments have intensified fears that President Trump could seek to replace Chairman Jerome Powell with a more compliant figure at the helm of the central bank, raising the risk of increased political influence over monetary policy. Such a move could seriously undermine investors’ trust in the US dollar and US Treasuries, as it would erode the Fed’s credibility as an inflation-fighting institution and potentially destabilise inflation expectations.
Given the precarious outlook for the public finances (see below), speculation could mount that the Fed would be pressured to monetise the public debt by using its balance sheet to buy government bonds. There is also concern that, in an era of geopolitical tensions, a politicised Fed might deny emergency dollar funding to foreign central banks in times of crisis[6].
Investors are also starting to worry that the quality of US economic data could suffer due to dramatic staff cuts implemented by Elon Musk’s Department of Government Efficiency (DOGE)[7]. In addition, the disbanding in February 2025 of two expert advisory panels has heightened worries about reduced transparency and possible politicisation of economic statistics[8]. These developments are important because reliable economic data is essential for informed decision-making by investors, businesses, and policymakers. Eroding the credibility of this data could potentially lead to reduced confidence in US financial markets.
Debt Worries
The outlook for the public finances is another source of angst for investors in US dollar assets. Proposed tax cuts under the Trump administration could further add to the growing public debt pile, which on current projections is already forecast to rise from 100% of Gross Domestic Product (GDP) in 2025 to 118% by 2035[9].
Budget plans currently passing through Congress, which would extend Trump’s 2017 tax reductions, as well as possibly introducing other cuts that Trump proposed on the campaign trail (such as taxes on tips, overtime wages, social security benefits etc.) could potentially add between US$5.7 trillion and US$11.0 trillion to public debt by 2035, depending on what measures are actually implemented[10].
It is possible that tariff revenues will provide some offset, but given uncertainty over what levies will remain in place and for how long, it is impossible to say how much. Moreover, the DOGE spending cuts are unlikely to meaningfully alter the debt trajectory, with Musk himself admitting that they might cut US$150 billion annually from the budget, down from his original expectation of US$1.0 trillion in savings[11]. Even this lower figure is in doubt.
Cracks in the Crown
All of these factors carry the potential to undermine confidence in the US dollar and US Treasuries as safe assets, with the implication that US borrowing costs – for the Government, businesses and households - could end up being higher than they otherwise would be. This is a risky policy path for the current administration. Foreign institutions and international investors hold around US$8.5 trillion of US federal debt[12] (about 24% of the total[13]) with the result that any switch away from US Treasuries would carry the potential to put upward pressure on US yields. Indeed, during the recent escalation of the US-China tariff war, there has been speculation that China, which holds around US$760 billion[14] of US Treasury bonds, was selling down its holdings.
Many of the dollar’s advantages (e.g. large dynamic economy, deep liquid capital markets) are unlikely to change, and the lack of viable alternatives suggests it will remain the dominant reserve currency for the foreseeable future. However, erratic policy, the potential politicisation of independent institutions such as the Federal Reserve, and concerns over public debt threaten to challenge the confidence that underpins the dollar’s global role. The end of dollar dominance is unlikely to be sudden or dramatic. But the policies of the Trump administration threaten to encourage the rest of the world to look seriously for alternatives. For now, King Dollar still reigns. But cracks in the crown are starting to appear.
Tuesday 15 April 2025
[1] https://www.bloomberg.com/news/newsletters/2025-04-01/supply-chain-latest-trade-uncertainty-hits-a-record-high?sref=QJEHVNWR
[2] https://www.reuters.com/business/trump-administration-sued-over-tariffs-us-court-international-trade-2025-04-14/
[3] https://www.theguardian.com/us-news/2025/apr/03/trumps-idiotic-and-flawed-tariff-calculations-stun-economists
[4] https://en.wikipedia.org/wiki/Reserve_currency
[5] https://abcnews.go.com/Business/trump-criticizes-federal-reserve-calls-lower-interest-rates/story?id=119982504
[6] https://www.reuters.com/markets/some-european-officials-weigh-if-they-can-rely-fed-dollars-under-trump-2025-03-22/
[7] https://www.ft.com/content/57ef7cef-3391-4282-bdb7-a4a0186370cd
[8] https://www.reuters.com/world/us/trump-administration-disbands-two-expert-panels-economic-data-2025-03-05
[9] https://www.cbo.gov/publication/60870
[10] https://www.reuters.com/world/us/republican-controlled-us-house-try-again-trump-tax-cuts-bill-2025-04-10
[11] https://www.independent.co.uk/news/world/americas/us-politics/elon-musk-doge-federal-savings-goal-b2732504.html
[12] https://fred.stlouisfed.org/series/FDHBFIN
[13] https://fred.stlouisfed.org/series/GFDEBTN
[14] https://www.reuters.com/markets/us/foreign-holdings-us-treasuries-steady-january-data-shows-2025-03-19