Dollar weakens as global reserve currency, while de-dollarization efforts accelerate

Protectionist trade policies are weakening the US dollar's position as the world's dominant reserve currency, while de-dollarization efforts gather momentum amid growing calls for an alternative global monetary system.

The US Dollar Index fell more than 11% in the first six months of the year to 97, marking its worst first-half performance since 1973. The index dropped 7% since US President Donald Trump announced sweeping reciprocal tariffs on April 2.

The fragmentation of global trade and geopolitical turmoil are prompting central banks and investors to move away from the US dollar and opt for alternatives such as gold, the euro, and the Chinese yuan.

Since the start of the year, the dollar has declined more than 12% against the euro, led by Trump's policies that have narrowed the US trade deficit but raised concerns over rising borrowing costs.

China has kept the yuan tightly pegged to the dollar, allowing Chinese export prices to remain competitive in key markets such as Europe.

The BRICS bloc — Brazil, Russia, India, China, and South Africa — has accelerated efforts to settle transactions without using the dollar. Trump said Tuesday that the bloc is trying to destroy the US currency and vowed to stop it.

A survey by the Official Monetary and Financial Institutions Forum found that 80% of central banks are concerned over the political developments in the US, while a net 16% of survey participants plan to increase their euro holdings over the next 12–24 months, and 32% of central banks aim to increase their gold reserves over the same period.

Trump's failure to deliver on his promise to cut public spending and his fiscal and foreign policies are some of the main reasons why investors are leaving the US market.

European Central Bank President Christine Lagarde said in May that the euro could play a larger global role as bilateral relationships replace multilateral cooperation, shaking the foundations of the current financial order.

Lagarde noted that a stronger international role for the euro could lower financing costs, reduce exchange-rate volatility and protect the eurozone from sanctions.

People's Bank of China Governor Pan Gongsheng said in June that US instability could increase the risk of a global financial crisis, underscoring the vulnerabilities of a system dominated by a single currency.

Despite the challenges, the US has no plans to relinquish the dollar's dominance. A bill proposing sanctions against countries with “unfair” foreign taxes on the US has been presented to Congress, and if passed, it would allow the US to impose targeted financial sanctions.

The US' total debt currently stands at $37 trillion and is expected to exceed $47 trillion by 2030.

Interest payments make up around 20% of federal tax revenues, fueling concerns over the long-term position of the US bond market and the US dollar.

In a surprising turn of events, billionaire Elon Musk — once a Trump advisor before a recent falling out with the president — harshly criticized the latest budget bill, which targets fiscal policies based on excessive borrowing.

New regulations are being made in the US to bring dollar-backed stablecoins — a type of cryptocurrency — to the masses worldwide, which could be seen as a faster and more pragmatic tool to manage US debt.

Trump's trade policies have sent conflicting signals, as they attempt to defend a strong dollar while benefiting from a weaker one.

However, the lack of a viable alternative remains the biggest obstacle to de-dollarization. Robin Brooks of the Brookings Institution said the Chinese yuan's tight state controls and the eurozone's debt constraints limit their ability to replace the dollar.

A recent analysis by Oxford Economics showed that a weaker dollar provides relief for developing countries with fragile balance sheets, including Hungary, Türkiye, Egypt, Chile, Malaysia and Colombia.

The research found that undervalued local currency bonds and foreign exchange markets in Türkiye, Chile and Egypt remain attractive, and demand could rise further if the dollar continues to weaken.

While the yuan's gradual appreciation and state control limit its appeal as a reserve currency, the dollar's decline is expected to support emerging market currencies and bonds, making emerging market assets and gold potential safe havens, Oxford Economics said.