Why the End of US Dollar Dominance Is Now Possible

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1:02Bloomberg Audio Studios. Podcasts, radio, news. You ever hear the expression, dollar is king? The dollar is king. We're going to keep it that way, OK?

1:23I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next. This week we're asking, does the rise of Trumponomics mark the beginning of the end for the dollar? The US has faced serious competition on a number of fronts in recent decades, but its currency has not. Roughly nine out of 10 foreign exchange transactions are conducted in dollars and almost half of all merchandise trade, The greenback also makes up nearly 60 % of the reserves held by governments around the world.

2:02And that unrivaled position for the dollar as the world's dominant reserve currency has brought some big advantages to US policymakers and consumers over the years. We'll get into some of those in this show. And as President Trump likes to point out, it has also tended to make US exports a bit less competitive. That might explain why the administration doesn't seem very bothered by the nearly 10 % fall in the value of the dollar in the first six months of this year. That's the worst decline in the first half of any year since 1973. But if that fall marks not a market adjustment, but the beginning of a much deeper loss of confidence in the US currency and America's unique role in the global order, then potentially this administration, future administrations, and Americans more broadly, well, they might start to care quite a lot.

2:56So how did the greenback become and stay the dominant reserve currency for so long? Have Donald Trump's policies seriously put it under threat? And what are the consequences for all of us if the dollar is no longer global top dog? Well, that's what's on my list for this episode. And I have investment-grade guests to help me with the assignment. Our own Saleha Mohsen, Bloomberg senior Washington correspondent and author of the book Paper Soldiers, How the Weaponization of the Dollar Changed the World Order. And dialing in from California, an academic whose work, you could say, is the reserve currency of global debate on this topic.

3:37Dr. Barry Eichengreen, professor of economics and political science at the University of California. Berkeley, and Dr. Eichengreen is also the author of a new book, Money Beyond Borders.

4:00I quite want to go back to basics, Professor Eichengreen. You suggested in a column for Vox EU that an understanding of Roman mythology can shed light on the way the world decides on a go-to reserve currency. Explain to us how Roman gods, Mars and Mercury, can help explain how reserve currencies get to be reserve currencies and how the dollar has been so dominant for so long. So the Mars and Mercury reference is designed to alert listeners to the fact that there are really two sets of factors that influence the attractions of a currency globally. The economic importance of an economy, so the dollar rose to prominence after World War II when the U.S.

4:47became the largest economy in the world. The leading trader had the largest financial markets. But at the same time, geopolitical factors, international relations, alliance politics matter for the tendency of central banks and governments to hold and use currencies. So in the 1960s, the West German government and the Japanese government, which relied on the United States for their defense, were willing to support the dollar through tough times. If you look today, you find that the central banks of South Korea and Japan hold more dollars as reserves than their trade relations and financial relations with the United States would lead you to expect.

5:33So there are worries about the fact that the U.S. share in the global economy has been declining gradually over time. But now there are also worries about fraying U.S. alliances, whether Donald Trump will turn his back on NATO, whether he's making friends or enemies abroad, and how that will affect the attractions of the dollar. I guess some people listening will still be curious about where Mars and Mercury come in. Truth be known, the reference came from my classically trained co-authors. But it's Mercury is the... God of commerce and Mars, the god of war, indeed. You did some estimates, which I think you kind of referred us back to more recently because it seems even more relevant than when you first wrote the paper a few years back, to the impact on things like the cost of borrowing for the US government and holdings of reserves if you think those two roles of the U.S.

6:29economy are somewhat ebbing. Our back of the envelope estimates are that the cost of borrowing for the U.S. Treasury would go up by 50, 60, 70 basis points, a bit less than one percentage point from its present, what, 4 % on the 10-year Treasury, where these alliance incentives to disappear. And that's the security. That's just from the fact that these allies are not sort of over-investing in dollars, if you like, because they are receiving this sort of other support from the U.S. Exactly. And that this would have an impact on the dollar exchange rate as well. And Saleha, I guess you should sort of update us briefly.

7:09I mean, I mentioned some of the headline numbers at the start, but what have we seen in foreign exchange markets since the start of the year and what do you think might be driving it? Well, there's hard data that is a drop in the compared to the global basket of currencies that we look at at Bloomberg. There's also the narrative. There's a narrative of a sell America trend that has picked up and is almost taken a hold as the market tries to adjust and then readjust to shifting tariff policies. We're seeing for the first time in a long time, the sell America narrative coming while there's concerns about America's ability to manage its public finances.

7:48So the U.S. debt trajectory, fiscal outlook is really, really bad with no fix on the horizon. It doesn't seem that there is any party in Washington that actually cares about doing anything and making the difficult trade-offs that would be required. And that in turn starts this vortex of, okay, people are selling out of American assets. That means American power to sort of outsource its geopolitical objectives by imposing economic sanctions, that's going to be less potent. And if nations and companies and multinational corporations are using fewer dollars, then American policymakers have less visibility into how the global financial system is being used for malign activities.

8:29And as to what Soleil has said, I think global investors are watching very carefully what's happening in terms of federal reserve independence. That is a very important factor in how they regard the dollar. And I guess we could also add the integrity of U.S. economic statistics insofar as that's also had a few shadows potentially cast over it the last few weeks with the firing of the head of the Bureau of Labor Statistics. And I mean, Saleha, I know you talk to these senior policymakers a lot off the record, but we tended to have pretty mixed messages on this, haven't we? I saw that the president recently said he wanted a strong dollar, but he also didn't like that it that made it harder to sell exports, that kind of inflated the value of the dollar.

9:12So how much do you feel the administration cares about this global role for the dollar? I think they do care. I think Trump really does like the idea of the dollar being a strong man, kind of like him, that can survive a lot. They're really putting it to the test. But like any politician, the Trump team wants the benefits of a strong dollar and then the benefits of a weak dollar all to happen at the same time, which is kind of not possible. And they're also sending mixed messages around the key pillars of what makes the dollar the reserve asset and so trusted by foreign investors. As Barry alluded to, that is the rule of law, the free and fair elections that we have, the strong democracy that we have, independent agencies and an independent central bank.

9:55Each of these pillars, every tenant is now being attacked. We touched on this a little bit in an earlier episode this year when we were talking about the potential for a so-called Mar-a-Lago accord. You know, Stephen Myron, who's now a senior economic advisor to the administration, had sort of sketched out a potential sort of deal that could be done between the US and its trading partners, where somehow the rest of the world would pay for more of the burden of having this global reserve currency. Whether or not we think there's anything in that or whether there's going to ultimately be any negotiations along those lines.

10:32I mean, Barry Eichengreen, you could argue that it's been a public good for the world to have a global reserve currency. And most times in global history, we haven't had one. And maybe it's not unreasonable for the U.S. to want countries to kind of pay in one way or another to continue to have a global reserve currency. I think it's important to recognize also that the United States derives very significant benefits from the dollar's international role. So people in the Trump administration would say there are costs. U.S. exporters find it a little bit more difficult to do international business because the dollar is stronger than otherwise.

11:14Although I would put the value of the dollar way down on the list of determinants of U.S. export competitiveness below the skills and training of American workers, the up-to-datedness of our technology and our capital stock and so forth. And then whether the dollar is a few percentage points higher or lower enters the list. On the other side of the balance sheet, U.S. banks and firms have the convenience of being able to do cross-border business in their own currency. They don't have to pay to purchase insurance, hedges, if you will. The Treasury can borrow at a lower cost than otherwise. We discussed that earlier.

11:53And the U.S. gets another form of insurance from the dollar's international role. The dollar is a safe haven. So when a bad thing happens, everybody rushes into dollars and into U.S. financial markets. And that's what has been different, it appears, about the spring of 2025, that when all this reciprocal tariff upheaval occurred, people rushed out of dollars, not in. Next week on Leaders with me, Francine Lacqua. I speak with Harvard Business School professor Linda Hill about what CEOs need to know to be successful. It really is not about them. It is about the organization. About how to lead in the age of AI.

12:35That requires a lot of confidence. And why great leaders embrace conflict. You need to amplify difference. Listen and watch Leaders, the podcast with me, Francine Lacroix, on Bloomberg TV or wherever you get your podcasts. Yes, Leia, I mean, that's something I think you mentioned in the piece that you wrote. There has always been that very striking safe haven quality to U.S. markets and the dollar in particular, where you can have, in the extreme example, you can have a shock involving the possibility of the U.S. defaulting, you know, when there's been a sort of standoff over the debt ceiling in Washington and investors are worried about the U.S.

13:15defaulting. Well, that's a scary thing happening. So then people go into U.S. Treasuries, even though the U.S. Treasuries are the asset that might be defaulted on. That is clearly something has changed this year when it comes to things like that. Oh, it has. I mean, global financial crisis is a clear example of when everyone should have been pouring out of American assets because the U.S. created and caused the subprime mortgage collapse that led to the global financial crisis. But everybody piled in just as proof that the dollar is so resilient. And it wasn't the case in April. But one thing to note is just the benefits that Barry pointed out to the U.S.

13:52for being the owner of the reserve asset, it hits every single American consumer. Because if there is just a few percentage point increase to the 10-year and what our borrowing costs are going to be, that is going to affect credit card debt, mortgage rates, auto loans, student loans, everything. That tiny number is not actually tiny when it comes to the household accounts. And that's actually the essence of Trumponomics, it's economic populism. Trump does not want that number to go up and he talks about it. He talks about borrowing costs going up and that the Federal Reserve should do something about it.

14:30But again, cognitive dissonance, not realizing that the fix that you're proposing is actually going to damage it. And that goes with their views of the dollar as well. You mentioned the financial crisis and I noticed that the other time that we'd had a big fall in the dollar was in, I think, 2010, when the Federal Reserve was cutting interest rates and that was possibly also adjusting from the rise that you were just referenced in the middle of the crisis. Currencies can swing 10 % either direction, even the world's reserve currency, and it doesn't necessarily mean it's a paradigm shift in reserve currencies, which obviously are subject to much more kind of long-term trends.

15:08Are we just kind of overreading this movement of the last six months? I guess Barry Eichengreen first. It's possible. I'm reminded of the 1970s when the Bretton Woods system ended. The dollar was devalued. It began to fall on the foreign exchange market. In 1976, Charles Kindleberger, one of the most eminent monetary and economic historians of his day said the dollar is, quote, finished, unquote, as an international currency, which obviously did not turn out to be the case. When there is an incumbent international currency, it takes a big, persistent shock to displace it. And there has to be an alternative.

15:53And it's not clear that those conditions are present. Well, actually, I was just going to follow up on that. And I know that Saleh will want to say something on this as well. But I mean, that has been always been the The answer that people have given, and goodness knows these discussions have been held over the decades, and I suspect that Professor Eichengrin has been involved in a great many of them. But the answer that's always given is, you know, these things take a really long time. The UK, sterling was the dominant global reserve currency for a long time, long after the US overtook the UK in terms of its economy.

16:26There was something like 70 years before the US dollar actually became the global reserve currency. Those kind of shifts just take a really long time. And crucially, if you're going to move out of the dollar, you need an alternative. And it isn't clear yet, Barry, that there is an alternative to the dollar out there. It isn't clear because there aren't enough safe and liquid euro-denominated reserve assets available to the rest of the world. And it's not clear that the European Union is in a position to create them. China is moving as fast as it can to promote international use of its currency, but it is starting out way behind the dollar.

17:06So even if use of its currency continues for cross-border payments, for example, continues to increase at double-digit rates, it will take a decade or longer before the Chinese renminbi comes within hailing distance of the dollar. So, you know, these kind of events occur slowly until they occur quickly. And Soleil, I mean, I guess the other alternatives, we talk a lot about crypto these days. I mean, there's Bitcoin, many might say was a potential alternative. And also people talk about stable coins, although I know that they have a slightly different implication for the dollar. But are either of those sort of likely alternatives?

17:46I actually think the most likely alternative is going to be a multi-currency era. rather than one currency taking over, we may face decades where the dollar is still dominant, but not quite as dominant. Maybe it was never designed to or meant to or doesn't need to be quite as powerful as it is in today's financial system. And we might see that the euro rises a little bit more, the yen, maybe the yuan, and maybe some of these other currencies or other assets like stable coins and maybe even Bitcoin. But I think when I think about alternatives, I don't think of one, I think of many. And that's a shock.

18:21It feels incremental, but it will be a shock to the system because then you might have things like runs on currencies with investors trying to figure out where is the safest place to go. Possibly. We don't care so much about a gradual decline of a dollar, or at least if one is just thinking about the sort of stability of the global system. We'd be much less worried about that than we would a sudden questioning of the U.S. government's credit worthiness and a dash for the exits from the dollar. I mean, Barry Eichengreen, how much do you think the probability of that kind of dollar route has gone up in the last year or so?

19:00It has certainly gone up if you're asking me for a number. I cannot provide, but I would have been dismissive of those stories of a route until this year. I would have agreed with Saleha that the most likely scenario is a gradual transition to a more multipolar system. But I think we now need to entertain the possibility of a route as well, simply because of the level of noise and chaos in terms of U.S. economic policy. And I do worry that if there is a sudden big move in the value of the dollar because foreign official and private investors grow significantly more reluctant to hold and use it, that could destabilize the U.S.

19:46Treasury market. That could destabilize important financial institutions that hold dollar-denominated assets that are suddenly losing value on the foreign exchange market. That could have quite dire consequences were to occur. We don't want to put numbers on the probability, but when does a decline become a route? What kind of numbers are we talking? I mean, we've seen a 10 % decline. We've seen that investors have more and more reason potentially to put their sort of marginal dollar in other countries. But when would you start worrying about a sort of self-fueling spiral? Does it need to be another 10 % when you're modeling these things?

20:24What kind of numbers are you thinking? Well, I think you have to worry both about how much the currency moves and what the time frame for the movement is. So another 10 or 20 percent over the next couple of years would not be hard for the markets to accommodate. Another 20 percent over the next couple of months, on the other hand, would be a big deal. Actually, it's in the tradition of this podcast that probably we would have had another 10 percent before it even comes out, because we've got about at least a week or so's delay after recording it. I guess, Soler, if we saw that kind of decline?

20:56We've already seen the administration sort of parry and declare truces and delays when there's a lot of pressure, for example, on the bond market. If you saw a big fall in the dollar potentially associated with other market moves, how do you think this president reacts to that? I would imagine that the current Treasury Secretary Scott Bessent would either himself or advise the president to make some kind of statement to stabilize the dollar. Traditionally, it's been the Treasury Secretary, but also you have to think about what and who would markets trust because investors are smart. They want to see that the policy is backing the words and the rhetoric.

21:40And in the past, we've seen Treasury work with the Federal Reserve. I've spoken to former Fed official Don Cohn about his time at the Fed when And they had to come out with a one-two punch around the global financial crisis, working with Treasury hand in hand to stabilize markets. And that's how airtight the case needs to be made to persuade investors to believe them. It cannot just be a truth social post by the president, or it cannot just be a comment by the Treasury Secretary on airwaves. I'm just thinking if we look at the revealed preference, as we might say, for this president, is just to beat up on trading partners with a greater stick.

22:17And he has said, for example, that he's going to do 100 % tariffs, or I can't remember, very high tariffs on anybody in the BRICS group that tries to develop an alternative reserve currency. I mean, you could imagine him wanting to come out with sort of big numbers that people are going to invest in dollars. Maybe it's forcing, pressuring central banks to buy lots of dollars for their reserves to prop up the currency. Barry Eichengreen, is there any scope for that kind of? I mean, you just tend to think that's the kind of thing that the president will be reaching for. But is that possible in an enormous global currency market?

22:53I do not think so. So, Stephanie, you talked before about the idea of a Mar-a-Lago Accord, where the president threatens tariffs if other countries don't let their currency strengthen and the dollar weaken. And now you're kind of suggesting the opposite. The fact of the matter is, as Saleha alluded to, the only branch of government that can affect what happens to the dollar ultimately is the Fed. And the Fed could strengthen the dollar were it to weak and significantly by, wait for it, raising interest rates. How would that be received in the quarters of the Treasury and the Oval Office? And really, that's the path untrodden, right?

23:34We've never seen the U.S. have to bully the world into turning to the dollar. It's always been a charm tactic. Well, we will leave that question hanging in the air, that unanswered question of how the president would respond to having to raise interest rates in order to defend the dollar. But Professor Barry Eichengreen, Saleha Mosin, thank you so much. Thank you. Thanks for having us.

24:02Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders. I was joined by Saleha Mosin and Dr. Barry Eichengreen. Trumponomics is produced by Moses Andam and Summer Saadi with help from Amy Keene. And special thanks to Rachel Lewis-Kriskie and John Ring. Sage Bowman is the head of Bloomberg Podcast. And please, we'd love you to help others to find Trumponomics by rating it and reviewing it highly wherever you listen to it.

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