Concerns surrounding unpredictable economic policies have led investors to reassess their confidence in the US dollar, a trend that is beginning to shake the foundations of the world's premier currency.

Following the announcement of Donald Trumps controversial tariffs, dubbed Liberation Day, on April 2, 2025, the dollar's value has experienced a significant downturn. While stock markets in the United States have largely rebounded since that date, the dollar, traditionally viewed as a safe haven in times of financial stress, continues to decline.

Analysts attribute this ongoing depreciation to fears of a potential recession in the US, driven by Trump's aggressive international trade measures. The dire implications of these policies have sparked investor concerns about the sustainability of the dollar's dominance in the global economy.

In a recent report, Deutsche Bank analysts highlighted that the world is facing a dollar confidence crisis as the effects of Trumps tariffs ripple through the financial markets. Over the past century, the US dollar has served as a global investment safe haven. Many countries peg their currencies to the dollar, maintaining a tight correlation with its value.

However, with growing apprehension regarding the long-term stability of the dollar, the potential consequences for the global economy could be severe.

What exactly triggered this decline? On April 2, the Trump administration unveiled harsh tariffs on imports from numerous countries, which not only diminished confidence in the US economy but also led to a massive selloff of US financial assets. In just three days following the Liberation Day announcement, the benchmark S&P 500 index lost more than $5 trillion in value.

Additionally, US Treasuries, once considered the epitome of safe investments, also faced selloffs that drove down their prices and caused a sharp increase in borrowing costs for the US government. In response to the immediate turmoil in the markets, Trump declared a 90-day pause on the implementation of some tariffs on April 9, with the exception of those affecting China. Nonetheless, investor trust in dollar-linked assets has not fully rebounded.

As of mid-April, the dollar has lost 3 percent against a basket of other currencies, reaching its lowest point in three yearsa decline that compounds a nearly 10 percent drop since the beginning of 2025. Karsten Junius, the chief economist at Bank J Safra Sarasin, stated in an interview with Al Jazeera, Investors have been selling US assets, and the value of the dollar has fallen. He emphasized that the dollar's decline has not mirrored the recovery of US equity prices, highlighting a troubling loss of confidence in US economic policymaking.

Why is the US dollar so crucial to the global economy? For over 80 years, the US dollar has held its position as the primary reserve currency globally, meaning that it is held in substantial quantities by various monetary authorities around the world. The dollar's preeminence can be largely traced back to the aftermath of the two World Wars, during which the US economy flourished while others struggled.

In 1971, the situation evolved further when President Richard Nixon removed the dollar's link to gold, enhancing the dollar's role in the global financial system. Following the so-called Nixon shock, many countries shifted away from gold convertibility but opted to peg their currencies to the dollar instead.

The dollar's influence extends beyond mere reserve currency status. While the US accounts for about a quarter of global GDP, a staggering 54 percent of world exports were denominated in dollars as of 2023, according to data from the Atlantic Council. Furthermore, approximately 60 percent of all bank deposits and nearly 70 percent of international bonds are denominated in US currency. In total, around 57 percent of the worlds foreign currency reserves are held in dollars, according to the International Monetary Fund (IMF).

However, the dollars status as a global reserve currency is heavily reliant on sustained confidence in the US economy, its financial markets, and its legal frameworks. Trump's unpredictable policies are jeopardizing that confidence. Junius remarked, He doesnt care about international norms, and indicated that investors are starting to realize their overexposure to US assets.

Foreign investors hold approximately $19 trillion in US equities, $7 trillion in US Treasuries, and $5 trillion in US corporate bondsamounting to roughly 30 percent of global GDP. If even a fraction of these investors begin to offload their holdings, the dollars value could face persistent downward pressure.

What outcomes can be expected from a declining dollar value? Members of Trumps advisory team argue that the disadvantages of the dollar's reserve status outweigh the benefits, claiming it makes US exports more expensive. Stephen Miran, chair of Trump's Council of Economic Advisers, recently stated that a high dollar valuation imposes undue burdens on our firms and workers, making their products and labor uncompetitive on the global stage.

At first glance, a weaker dollar could make US goods more affordable for international buyers, thereby boosting domestic manufacturing and potentially reducing trade deficits. However, the flip side is that it would also result in higher import costs, adversely affecting consumers. As noted by former Colombian finance minister Jose Antonio Ocampo, The general view is that US inflation will increase due to this. He also pointed out that a rising gold price reflects a growing preference among central banks for gold over US Treasuries in a shifting economic landscape.

Ocampo further asserts that confidence in the dollar has been shaken due to Trumps tariff announcements, which have allowed other safe-haven currencies to appreciate in value. For instance, the euro recently surged to a three-year high above $1.14, gaining more than 5 percent against the dollar since the beginning of April.

Is there a possibility that another currency could replace the dollar as the worlds dominant currency? Ocampo believes that, for the time being, the dollar will retain its status as the leading global currency. Nevertheless, he warns that Trump's policies may be undermining the very economic foundations that support dollar dominance. He identified the euro and Swiss franc as two currencies that could stand to gain from a weakening dollar. The euro currently constitutes about 20 percent of international foreign exchange reserves, which is one-third of the dollars value.

Ocampo concluded by stating that if the European Union can achieve closer fiscal cooperation and enhance integration across its financial markets, the euro may emerge as a viable alternative to the dollar in the future.