Is the dollar’s hegemony coming to an end?

Hayri Kozanoğlu

When the global economy is in turmoil and risk perception rises, money traditionally finds refuge in certain “safe havens.” These include gold, the Japanese yen, the Swiss franc, and most notably, the US dollar. Even during US-centred upheavals like the 2007–08 Global Financial Crisis and the Covid pandemic, this pattern held. However, when Trump declared April 2nd a day of liberation and imposed tariffs, expectations were upended. While other safe havens appreciated, the dollar continued to lose value. Meanwhile, German treasury bonds gained appeal, contributing to the euro's appreciation against the dollar.

Moreover, as US stock markets declined, the natural expectation was for 10-year US treasury bonds to become the primary alternative. Instead, their prices fell and yields rose, signalling a drop in confidence in the dollar and a broader withdrawal from US assets. Despite the sharp declines in stock markets prompting leveraged investors to liquidate even government bonds to cover their margins, a clear trend of retreat from the $36 trillion market emerged.

GLOBAL CAPITAL DEBATING

The debate over the dollar’s stability as a reserve currency gained further traction when Financial Times, an influential organ of finance capital, published a lengthy article endorsing the view (Is the world losing faith in the almighty US dollar? – F. Times 17.04.2025). The article recalls that in 1971, then-president Richard Nixon ended the dollar’s gold convertibility and thus the Bretton Woods Agreement of 1944, while simultaneously imposing a 10% import tariff.

It points out that Nixon’s shock paved the way for floating exchange rates and, by encouraging rapid credit expansion and global capital flows, paradoxically strengthened the dollar. Yet under Trump, the opposite trend is emerging: A marked capital flight from the dollar.

The article stresses the importance of two questions. First, how far can this decline go? Foreigners currently hold $19 trillion in US stocks, $7 trillion in US treasuries, and $5 trillion in corporate bonds. Even a limited withdrawal from these portfolios could put further pressure on the dollar.

Second, if this depreciation continues, will the dollar’s unique role in the global economy and financial system erode? The article cites prominent analysts and investors who believe the “Trump shock” could spell the end of the dollar’s near-century-long dominance.

It's one thing for dissenting publications or academic journals to speculate on the dollar’s future; it’s quite another when those who actually manage money take action. This latter group not only theorises but can accelerate de-dollarisation by offloading portfolios.

For years, the words of Nixon-era Treasury Secretary John Connally at the G-10 meeting in Rome have been remembered: “The dollar is our currency, but your problem.” But this time, the dollar risks becoming America’s problem too.

DOMINATES TRADE

Currently, 88% of global currency transactions involve the dollar. 54% of export invoices are in dollars. 60% of foreign debt and 70% of international bond issues are dollar-denominated.

There are $2 trillion in banknotes in circulation. Over half of them are held in foreign hands literally in pockets or safes. A simple calculation shows that with 2.5% inflation, the US Federal Reserve earns $50 billion just from the dollar’s loss in purchasing power, this is known in economic literature as seigniorage revenue.

Overall, the dollar’s reserve currency status boosts demand for it, keeping its value high. This makes imported goods cheaper for consumers. Its abundant supply also keeps interest rates low, allowing the government to borrow cheaply and average citizens to access relatively low rates for mortgages and credit cards.

There’s also the well-known concept in economic literature called the Triffin Dilemma, named after Belgian economist Robert Triffin. To maintain the dollar’s role as a reserve currency, it must be sufficiently supplied to international markets, possible only if the US runs continuous current account deficits, spending more foreign currency than it earns. The dilemma arises from needing to maintain enough of a deficit to provide global liquidity without undermining trust in the currency.

THE MAR-A-LAGO ACCORD

This issue is also on the radar of Trump’s Harvard-educated economic advisor, Steve Miran. He argues that this situation enables all countries to run trade surpluses against the US, ultimately undermining American manufacturing. He believes a solution is needed.

Miran’s plan involves pressuring trade partners to devalue their currencies, thereby boosting the competitiveness of US manufacturing. As this plan was first discussed at Trump’s estate, it’s been dubbed the “Mar-a-Lago Accord.”

It harkens back to the 1985 Plaza Accord between the US, Japan, Germany, the UK, and France, where these nations were pressured to devalue their currencies. Although the US hoped this would reduce its trade deficit, it didn’t. Meanwhile, Japan’s attempt to devalue the yen by offloading dollar assets led to economic overheating. The resulting stock and property bubbles burst, triggering a prolonged stagnation that still reverberates today.

Forty years later, especially with Trump wielding the tariff stick against allies, such an agreement seems impossible.

In practice, since Trump took office and implemented his policies, the dollar has lost about 12% of its value against the euro. This has had a greater effect on US trade deficits than tariffs, making imports more expensive and exports cheaper. In contrast, tariffs, unless met with retaliation, only deter imports without affecting exports.

CHINA’S RISE

So, what causes the US’s chronic trade deficits? Can tariffs solve this problem? Let’s hand over the floor to Marxist economist Michael Roberts at this point. He explains that under capitalism, trade and capital account imbalances don’t arise because a more productive economy forces a less productive one to run deficits, but because capitalism is a system based on uneven and combined development. In such an environment, low-cost national economies gain an advantage over those less active in international trade.

What worries American capitalists is not that surplus countries force them to print more dollars. It’s that China is closing the gap with the US in productivity and technology and posing a threat to its economic hegemony. (Tariffs, Triffin and the dollar, 14.04.2025, Michael Roberts blog)

Back when the dollar gained its reserve currency status after 1944, the US was the world’s largest economic and military power, and a staunch defender of free trade. Today, the US has abandoned these principles and, as a result, has also lost ideological credibility. However, no power has yet emerged that can truly challenge the dollar’s dominance.

China, due to its capital controls and the yuan’s lack of full convertibility, is not a viable candidate to replace the dollar. As for the EU, it faces its own chronic problems and lacks a unified capital market. Struggling with stagnation and relying on trade surpluses to cope, it’s also unable to provide sufficient global liquidity. Countries like Switzerland or Australia, with relatively small economies, don’t have the potential to fill this gap either.

For these reasons, there seems to be no alternative poised to dethrone the dollar in the short term. However, just as the world has become multipolar and fragmented along geopolitical fault lines, a similar trend may manifest in currency markets: regions of multiple sovereignties led by different dominant currencies, with alternative payment systems emerging.

Note: This text has been translated from the original Turkish version titled Doların hegemonyası sona mı eriyor?, published in BirGün newspaper on April 22, 2025.