Trump's presidency might have signaled a shift in the dominance of the US Dollar as the world's leading currency.
In the financial realm of 2025, the U.S. dollar's dominance persists, despite turbulent waters presented by international capital outflows and mounting political controversies surrounding the Federal Reserve chair.
Last year, stocks surged on hopeful anticipation that the incoming president would usher in an American renaissance. This optimistic outlook, however, seems to have faltered. The dollar has dropped by 9% against major currencies this year. Given the U.S.'s reliance on foreign capital to finance its budget and trade deficits, this situation raises cause for concern. As Torsten Slok of Apollo Management notes, foreign investors own a staggering $19 trillion in U.S. equities and $7 trillion in government bonds, representing a substantial 20%-30% of the market. These substantial funds are now seeking refuge in more predictable climates.
Jerome Powell's tenure as Federal Reserve chair has recently been marred by public criticism from the sitting president, who expressed his desire for Powell's dismissal. Trump's dissatisfaction stems from Powell's reluctance to lower interest rates. Politicians openly attacking central banks is generally considered beyond the pale, as central-bank independence is a cornerstone of modern economic policy. When politicians meddle with interest rates, they often abuse the power, destabilizing economies and financial systems.
Trump may lack the legal authority to remove Powell, as he did clarify that he would merely "like to see" the chair be "more active." The purpose of Trump's rhetoric, suggests Nick Timiraos in The Wall Street Journal, appears geared toward laying the groundwork to blame the Federal Reserve should an economic slump ensue later this year as a result of Trump's trade war.
On the issue of Powell's supposed favoritism, Trump asserts that "Powell worked to help Biden during his term" with rate cuts, but now "is unwilling to provide the same support." This argument overlooks several facts; first, Powell was originally appointed by Trump in 2018, second, Powell provided unprecedented support to the economy during Trump's term in 2020, and third, Powell's Fed raised rates steeply in 2022 and 2023 while Biden was in office. Such politicization of the Federal Reserve negatively impacts the dollar's credibility.
Despite these challenges, Daniel Moss on Bloomberg posits that "American prestige has taken a hit," but the dollar's reign as a global pillar appears to be secure for now. The greenback's role in international trade has survived various American crises in the past, from the 1971 "Nixon shock" to the 2008 subprime mortgage crisis. Rather than heralding a fundamental reordering of the global financial system, the current situation might better be described as a healthy currency market correction after a period characterized by an overvalued dollar.
Rivals such as the yuan and the euro have yet to challenge the dollar's supremacy, partly due to China's stringent capital controls and the shallower market for German bonds compared to U.S. Treasuries. Nonetheless, central banks are increasingly exploring alternatives, with gold representing a growing area of interest.
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- Foreign investors, who own considerable amounts of U.S. equities and government bonds, are now seeking refuge in more predictable climates due to the dollar's drop against major currencies.
- Given the U.S.'s reliance on foreign capital and the substantial funds now shifting away, the current situation raises cause for concern.
- Amidst the political controversy surrounding the Federal Reserve chair, some central banks are exploring alternatives, with gold representing a growing area of interest.
- The role of the greenback in international trade has survived various American crises, but its supremacy might be challenged in the future, particularly by the yuan and the euro, as central banks continue to seek alternatives.
