The United States has long occupied the center of the global financial system, with the US dollar being the backbone of the world economy. Private investors rely on the dollar as a store of value in times of uncertainty.
Governments and central banks hold dollars to manage the value of their own currencies and as a form of protection against economic crises. Key raw materials such as oil are also priced in dollars.
This dominant position, which granted the United States enormous privileges, including the ability to borrow cheaply and the ability to use the global financial system as a tool of governance, is often explained by the size and stability of American markets and the strength of its institutions. But behind these economic fundamentals lies something more intangible: trust.
Countries and private financial institutions hold dollars, trade in dollars, and borrow in dollars because they trust the United States to maintain an open, rules-based international order. They also trust that the United States will honor contracts, protect property rights, and manage the global financial system responsibly, acting as an international lender of last resort in periods of crisis.
The dollar system has long had its critics. After the global financial crisis, which occurred between 2007 and 2009, emerging economies faced serious consequences derived from US monetary policy and increasing exposure to dollar-denominated debt. They also witnessed the increasing use of financial sanctions as a tool of American foreign policy.
China, Russia, India, and other countries outside the West began building alternative financial infrastructures: new payment systems, currency swap lines, and initiatives to internationalize their own currencies. What began as a gradual search for some form of protection from American financial power quietly created cracks at the margins of the dollar-based system.
However, nothing was as disorienting to the dollar’s global role as the second Trump administration’s open attacks on the liberal international economic order. The imposition of sweeping trade tariffs, as well as efforts to undermine international and domestic institutions, represent a fundamental break with the promise of responsible American financial leadership.
Previous predictions about dollar depreciation turned out to be premature. But, as we argue in a recently published article, the erosion of trust in the United States as a guarantor of the liberal international order must be taken seriously. What we are witnessing is not the immediate collapse of American financial power, but the beginning of a slow transition towards a fragmented, multipolar and less predictable global monetary system.
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Breakdown of confidence in the dollar
Three events stand out. First, Washington’s commitment to the liberal economic order under Donald Trump’s leadership is being widely questioned. Instead of acting as a guarantor of open markets, Trump reframed global trade as a transactional system where countries must “buy” US tariffs. This means that other countries must now buy US Treasuries and other securities in exchange for access to the US market.
Second, the rise in US debt increases doubts about the country’s fiscal stability. The Trump administration’s major tax cuts and spending plans are expected to generate persistent deficits of around 6% of GDP, and US public debt has soared to record levels. This led foreign central banks to reduce their dollar holdings.
Third, the Trump administration is openly attacking and undermining US government agencies and the country’s central bank, the Federal Reserve. Trump has repeatedly threatened to replace current Fed Chairman Jerome Powell and fire other central bank officials since returning to the White House in January.
Central bank independence is considered a hallmark of credible monetary governance, and undermining it raises questions about whether the United States remains a reliable anchor for the global financial system. According to Reuters, European authorities are openly questioning whether the Federal Reserve will continue to supply dollars to foreign central banks in times of financial crisis.
Together, these measures affect the fundamental basis of dollar dominance: the assumption that the United States will behave predictably, responsibly, and with institutional restraint.
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Despite the turbulence, no single currency is ready to replace the dollar. The Chinese renminbi still lacks open capital markets and strong legal protections, while the euro lacks a unified tax authority. New digital currency platforms remain experimental or speculative.
Still, the world is moving toward a more fragmented monetary landscape. Countries are diversifying their reserves into gold and other non-dollar assets. At the same time, regional payment systems are proliferating and dollar-denominated lending to emerging economies is declining.
Commodities are also increasingly priced in currencies other than the dollar. And not only are countries like China withdrawing from the dollar system, but even US allies in Europe are encouraging banks to reduce their dependence on dollar financing.
The global economy is entering a financial interregnum: a period in which the old order is fading, but the new has not yet been born. The dominance of the dollar will not disappear overnight, as too many institutions and networks still depend on it. But its undisputed supremacy is coming to an end.
A fragmented financial system will reduce American leverage, while making the global economy more complex and possibly more crisis-prone. The dollar is not dead. But the world is slowly preparing for life beyond dollar hegemony, and the second Trump administration could be the catalyst that turns long-standing dissatisfaction into systemic change.
*Fabian Pape is a Leverhulme Research Fellow in the School of Social and Political Sciences at the University of Edinburgh; Johannes Petry is a CSGR researcher at the University of Warwick and Tobias Pforr is a visiting researcher at the Robert Schuman Center for Advanced Studies at the European University Institute.
This text was originally published in The Conversation
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