The U.S. dollar’s role as the de facto global reserve currency is looking increasingly uncertain
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The dollar’s status as a safe-haven currency, and more important, as the de facto global reserve, is facing an uncertain future. – MarketWatch photo illustration/iStockphoto
Volatility that gripped global markets over the past two weeks may be subsiding, at least for now.
But some on Wall Street say that President Donald Trump’s aggressive approach to rolling out his tariff agenda might trigger lasting consequence for U.S. markets. Specifically, the dollar’s status as a reliable “safe haven” has been tarnished, and its role as the de facto global reserve currency has been looking increasingly uncertain.
Signs of growing dissatisfaction with the dollar can be seen in the breakdown of its longstanding correlation with other markets.
Steve Englander, head of global G-10 foreign-exchange research and North America macroeconomic strategy at Standard Chartered, highlighted the pattern, which has emerged since Trump’s April 2 “liberation day” tariff announcement, in the chart below.
”The market clearly now has doubts,” Englander told MarketWatch via email.
– STANDARD CHARTERED
When investors start losing confidence in stocks and bonds, many often seek shelter in the global currency market.
According to data from the Bank for International Settlements, the market for foreign currencies has become far more liquid than markets for stocks and bonds, with a daily turnover of $7.5 trillion as of 2022. Investors can shift in and out of currency positions 24 hours a day, except on weekends.
For decades, the dollar, the Swiss franc and Japanese yen were among the most popular options for investors seeking calmer ports in volatile markets.
But while the yen USDJPY, franc USDCHF and euro EURUSD have shot higher over the past few weeks, the ICE U.S. Dollar Index DXY, a popular gauge of the dollar’s value against its main currency rivals, sank to its lowest level in three years. By comparison, the Swiss franc recently climbed to its strongest level in 14 years.
The latest selloff wasn’t the first time that global confidence in the dollar has been challenged, said Thierry Wizman, global FX and rates strategist at Macquarie Group.
There was “a lot of consternation” against the greenback during the early days of the financial crisis, beginning around mid-2007, Wizman said. Investors initially viewed the mortgage-bond meltdown as a uniquely American problem.
However, by the time the European debt crisis was triggering bailouts in 2011, confidence in the greenback had been restored.
This time, things feel different, Wizman said. Instead of shoring up confidence in the buck, Trump’s embrace of tariffs seems intended to undermine a system that Washington previously pioneered.
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.
“During the [financial crisis], there wasn’t a movement in the U.S. to dismantle the international trade system or the international financial system. We had a financial shock, but if anything, the U.S. policymakers were proactive in trying to save the system, including through the use of diplomacy,” Wizman said.
“Now there’s this perception that not only have the motivations changed, but the methodologies have changed. It speaks to a U.S. that is no longer the underwriter of its own system. Instead, the U.S. is going about disassembling that system in a non-diplomatic and abrupt way.”
Any shift away from a system that places the dollar at the center of global commerce likely won’t happen overnight, said Atul Bhatia, a fixed-income portfolio strategist at RBC Wealth Management. “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. According to data from Swift, an international interbank payments network, the dollar remains involved in nearly half of all global transactions.
The dollar snapped a five-day losing streak on Tuesday. The ICE dollar index was up 0.5% around the time that the closing bell rang out on Wall Street. Still, the buck has fallen by more than 9% from its 52-week high on Jan. 13.
Given its rapid shift lower, Bhatia said the buck might be due for a near-term bounce. After that, 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.”
Given the degree of foreign holdings of U.S. assets, like stocks and bonds, this shift could have far-reaching consequences for Wall Street and Main Street savers alike.
