The world is witnessing a seismic shift in global economic dynamics, as the dollar’s role as the de facto reserve currency hangs precariously in the balance. The recent tariff announcements by President Donald Trump have sent shockwaves through global markets, leaving many to question whether the dollar can maintain its status as a safe haven during times of market stress.
Traditionally, investors sought refuge in the dollar when faced with economic uncertainty. However, with the dollar’s value plummeting to its lowest level in three years, this trend is now under threat. The Swiss franc and Japanese yen have both risen significantly against the dollar since Trump’s tariff announcements, sparking concerns about the dollar’s ability to maintain its dominance.
“We have doubts,” said Steve Englander, head of global G-10 foreign-exchange research at Standard Chartered, in an email to MarketWatch. “The market clearly now has doubts.”
According to data from the Bank for International Settlements, the market for foreign currencies is more liquid than ever, with a daily turnover of $7.5 trillion as of 2022. However, the dollar’s share of global central-bank reserves has been shrinking since the late 1990s.
Thierry Wizman, global FX and rates strategist at Macquarie Group, noted that there was “a lot of consternation” against the greenback during the early days of the financial crisis. However, this time around, things feel different. Trump’s aggressive approach to tariffs has undermined confidence in the dollar, threatening its status as a safe haven.
“The policy shake-up not only threatens the dollar’s status as a safe haven during times of market stress, it also could erode the dollar’s status as the de facto global currency,” Wizman said. “That could unleash a host of negative consequences, including higher borrowing costs for the U.S. government and consumers.”
Atul Bhatia, a fixed-income portfolio strategist at RBC Wealth Management, noted that any shift away from a system that places the dollar at the center of global commerce would not happen overnight. The network effects are strong, he said.
By some measures, the world has been shifting away from its dependence on the dollar for decades. Data from the International Monetary Fund show the dollar’s share of global central-bank reserves has been shrinking since the late 1990s. However, its dominance in trade remains largely undiminished.
The dollar snapped a five-day losing streak on Tuesday, but it fell by more than 9% from its 52-week high on Jan. 13. Bhatia said the buck might be due for a near-term bounce, but longer term, it will likely continue to weaken.
“There could be some tailwinds for the dollar here,” he said. “But longer term, we think that folks are going to be looking toward their own markets and their own regions.”
The shift away from the dollar’s dominance has far-reaching consequences for Wall Street and Main Street savers alike. As investors increasingly look towards their own markets and regions, the dollar’s status as a reserve currency is likely to continue its decline.
In conclusion, Trump’s tariff announcements have sent shockwaves through global markets, threatening the dollar’s role as a safe haven during times of market stress. The shift away from the dollar’s dominance has far-reaching consequences for Wall Street and Main Street savers alike, and it remains to be seen whether the dollar can maintain its status as a de facto reserve currency.
Source: Market Watch
