How the tariff war puts the U.S. dollars global reign at risk.

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For decades, American consumers, global investors, and international traders could interact productively in a shared economic order thanks to their mutual trust in one powerful instrument: the United States dollar. In the aftermath of the Great Depression, when nations wisely stopped backing their currencies with gold and the U.S. cemented its position as the globe’s economic steward, the dollar became the world’s reserve currency, a sturdy venue for value storage, for trade, for the circulation of cash. Anyone could buy U.S. debt through long- and short-term bonds issued by the Treasury Department, with reasonable assurance that such investments were safe and guaranteed. In turn, the States benefited from this hegemony, which granted it economic power over other nations. In spite of diplomatic conflicts, in spite of whipsawing interest rates, in spite of U.S.-born economic crises that wracked the entire world, the stability of the dollar remained the core engine of commerce, the determinant of the New World Order. And, for the most part, it was good (for us).
Now, thanks to President Donald Trump, the dollar’s reliability and world-leading position are no longer sacrosanct. And the consequences of this possible shift are staggering—potentially catastrophic.
When the stock market began plunging last week in response to Trump’s eye-watering “Liberation Day” tariffs, economist Adam Tooze warned that the right charts to follow weren’t those trading indices, but the bond markets. Throughout the month, you could spot a grim indicator there: Tariff announcements usually boost the value of the dollar, because higher import taxes (priced in dollars) tend to weaken other countries’ currency valuations and spending power. But this time, it was the dollar that weakened in the aftermath of Liberation Day. Normally, traders would attempt to preserve their money by selling off their stocks at a good price—hence, the market crash—and then put that revenue into safer, longer-term investments, like Treasury bonds (i.e., U.S. dollars). This time, however, traders were also selling off their Treasury holdings, a sign that they were nervous about the U.S. economy. Yields from 10-year bonds reached their highest level in years, something that only tends to happen in moments of economic crisis. At a time of already high interest rates, elevated yields make so many parts of the everyday economy—bank loans, mortgages, personal credit, insurance—so much more cost-prohibitive than they’d already been.
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Peeking behind the trading desks, the Financial Times noted that international hedge funds and asset managers have been selling off their Treasury holdings in order to reduce their exposure to risk—and, in some cases, pivoting to physical cash holdings instead. And, despite widespread speculation, countries like Japan have not been dumping their Treasury holdings en masse—which is a relief, since it’s one of the single biggest foreign holders of U.S. dollars. Had that been the case, panic would have been warranted.
Nevertheless, concerns remain. The overall selloff in both 10- and 30-year Treasurys has continued well into this week, persisting in its worst rout since the pandemic crash. (Although, to be very clear, it is not anywhere near as bad as that moment.) The 30-year Treasury yield reached levels it hadn’t seen since the late-1980s stock market crash; the 10-year yield is at levels unseen since the Great Recession. Plus, Japan has been reducing some of its Treasury holdings throughout the year, albeit gradually—not with the type of sudden overnight dumps we saw this week. And China (the single largest foreign Treasurys holder) recently directed state-level banks to hold off on purchasing more dollars, according to Reuters. With the continued yield rise we’ve seen this Friday morning, there’s no reason to believe basis traders are done offloading their Treasurys.
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On a broader scale, there’s investor skittishness over any U.S.-linked assets and securities. The dollar no longer commands the overwhelming share of global reserves that it did just two decades ago; the shift from public Treasury stashes toward more privatized holdings (like hedge funds) opens up the entire enterprise to more market volatility. Foreign currencies are faring better than U.S. Treasurys and may become more attractive investment options, as European, Chinese, Japanese, and Australian currencies earn bullish forecasts. Deutsche Bank warned in an investment note on Wednesday that various financial entities and banks are divesting from U.S. dollars, paving a path toward “uncharted territory.”
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There have been hints at global dollar bearishness for a few years now. As I noted late last year, the economic shock of the COVID recession led various nations to stock up on gold reserves in their central banks as a hedge against the dollar. That international gold rush persisted in the aftermath of Donald Trump’s reelection, as trading partners (very reasonably, it turns out!) looked to safe havens that were not the U.S. dollar. Considering the diplomatic chaos of Trump’s last term, and the campaign-trail rhetoric that showed he clearly didn’t understand anything about tariffs, there was no reason for anyone, anywhere, to believe that the U.S. would remain a stable area for long-term investment.
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And it wasn’t just tariffs that the world had to worry about—it was a bit of everything. Economic relations with the U.S. have now grown increasingly unstable, unreliable, and unappealing, as Trump’s diplomatic and financial policy leaves everyone uncertain of where they stand. It doesn’t help that Trump prematurely canceled all that international aid, completely undermining any trust remaining in basic American contracts.
By February, asset managers were telling the Bank of America that they would much rather turn to internationally based companies and gold bars instead of American stocks. Continentwide stock bullishness made European stocks a good deal, and widespread hostility toward the U.S. inspired Goldman Sachs to compile a thorough report on how boycotts of American brands were spreading far beyond just Canada. One popular Dutch researcher even told European business owners to stop storing their virtual data in American cloud servers.
What’s even more terrifying is that the Trump administration’s actions come across to Deutsche Bank and other analysts as a purposeful tanking of the dollar. The attacks on the Federal Reserve’s independence and threats to replace Jerome Powell are scary enough—the prospect of the mad king let loose with the central bank. But in a report from last month, Bloomberg noted a maddening contradiction within Trump’s campaign statements: “Trump has said he wants to maintain the dollar’s central role globally, once threatening to retaliate against any country that tries to decouple its trade from the US currency. At the same time, during his campaign he indicated he’d welcome a weaker dollar because it would make US products more competitive.”
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And then there’s the infamous “Mar-a-Lago Accord.” Stephen Miran, a crypto-friendly asset manager who now heads Trump’s Council of Economic Advisers, wrote a paper last November that advocated for purposefully weakening the dollar and using the threat of tariffs to get other countries to spend more on American factories and outputs, at a lower cost, over the long haul. (He recently doubled down on this.)
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That’s not gonna work. Arm-twisting other nations into devaluing the dollar would completely destabilize the world economic order, throwing the entire system into chaos until international diplomacy settled on a new, trusted reserve-currency alternative. Also, the bullying wouldn’t be effective. China has already been dealing with belligerent trade policy from Biden’s term and Trump’s first go-round, and the East Asian giant is now far better equipped to withstand an aggressive trade war with the U.S. than anyone in the Trump administration realizes.
Truly, there are no “adults in the room” now. Cabinet members are pretending everything is fine; the House of Representatives just passed a massive, ill-advised tax cut; the Project 2025 goons who’ve been guiding this administration have already written that they want to return to the ruinous gold standard.
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Per various insider reports, it was the “yippy” bond-market freakouts that led Trump to back off on his higher reciprocal tariffs, even as he raised duties against China and kept other, lower universal tariffs in place. Still, Treasury holders are clearly not assuaged, and they’ve been antsy for years at this point. Should the U.S. dollar lose its potency, this country would face an unprecedented financial crisis. If you thought recent inflation was bad, just wait until you have to deal with a system where no one wants to even touch the dollar because there’s no global faith left, plunging it into near-worthlessness. No gold stashes or governmental cryptocurrency reserves would save us.
We’re not there yet. Hopefully we never will get there. But I’ll leave the last word to Adam Tooze: “For life to continue anything like normally, this narrative must remain, to a degree, a fear rather than a reality.”