Can The Dollar Keep Up In The Global Markets?

Trump plans to impose tariffs on Europe, China, and other US trading partners to bring manufacturing back home and "Make America Great Again." Instead, this move could backfire, as the consequences may end up weakening the US dollar, making his long-term goals even harder to achieve.

Dollar Is Struggling

After the so-called 'Liberation Day of Trump,' the US dollar faces significant pressure due to recent policies. On April 3, 2025, the Bloomberg Dollar Spot Index fell by 2.1%, its sharpest intraday drop since 2005. The US Dollar Index (DXY) tumbled about 2%, reaching a six-month low. The dollar weakened by over 1% against major currencies, including the euro and the yen. Reuters reported that the euro jumped more than 2% against the dollar, marking its biggest intraday advance in nine years. The dollar fell 1.8% against the Japanese yen. Deutsche Bank stated, "major risk of capital allocation could take over from currency fundamentals and currency moves disorderly."

The EU Chief also expressed concerns about the global economy, warning that tariffs could deal a significant blow. Tensions surrounding a trade war have intensified since Trump stepped into the White House. Tariffs have raised fears of a global trade war and recession, convincing investors to move away from US assets. The implementation of tariffs and market reaction has led to the decline of the dollar. 

Currently, most global trade is conducted in US dollars. Many countries hold large amounts of dollars to trade goods and services. If Trump's tariffs make US goods too expensive, other countries might reduce their reliance on the dollar and instead trade in other currencies like the Chinese yuan or the euro. If fewer countries use the US dollar for trade, its global importance could shrink. This could lead to economic instability in the US and reduce its financial power.

The "Exorbitant Privilege" of the US Dollar

According to Al Jazeera, the structure in which the dollar dominates means that higher yield expectations for US assets will only further strengthen the dollar. For a long time, the world's high demand for US dollars has made the currency itself one of America's biggest exports. This special advantage has allowed the US to run trade and budget deficits without seriously harming the economy.

In simple terms, many countries use the dollar to buy and sell goods internationally, and foreign investors hold US dollars as a safe investment. This enables the US to spend more than it earns because other countries are willing to lend it money by purchasing US bonds. The government can run large deficits without facing major financial crises. Imagine having a credit card with unlimited borrowing power, and every store in the world accepts your card. You can keep spending without worrying too much about debt because people trust that you'll eventually pay it back. That's what the US has with the dollar. This advantage, known as the "exorbitant privilege," allows the US to sustain a high level of debt. However, if fewer countries want to use the dollar, the US might lose this power, leading to higher inflation.

Can the Dollar Bounce Back?

The recent drop in the dollar hasn't significantly weakened it because it had already risen substantially due to the strong US economy and high interest rates. If global economic worries intensify, investors might rush to buy US Treasuries, which could boost the dollar again. Despite the decline, the dollar remains the world's dominant currency. Most central banks hold it in their reserves, and it is widely used to buy key commodities like oil because no other currency has emerged as a serious alternative.

Harvard Professor Carmen Reinhart noted, "The rise and fall of currencies is not something that occurs because you get a wildcard president who is doing his best to kill globalization. The dollar did not overtake the British pound as a reserve currency overnight."

In Europe, leaders see this as an opportunity to strengthen the euro by improving their financial markets so it can compete more effectively with the dollar. Some developing nations have also floated the idea of working together to reduce the dollar's dominance in global trade.