by Gerard Lyons

Chief economic strategist at NetWealth

May 27, 2025

from NetWealth Website

Information sent by MJGdeA

A slightly different version of

this column by Gerard Lyons appeared in

The Times on Tuesday, 27th May.

It looks at whether

the US Dollar is losing its dominance

and whether we are in the early stages

of moving to a multi-polar currency system...

Under Donald Trump,

a gradual shift to a

multi-polar currency system

is starting to speed up...

Is the Dollar in the early stages of losing its safe-haven status?

Last Friday it fell to its weakest level since December 2023 on its trade-weighted basis, as international investors continued to come to terms with President Trump's policies.

Scott Bessent, the Treasury secretary, has said that the United States' strong Dollar policy is intact, but the markets are not convinced.

The policy appears to be a weaker Dollar to boost competitiveness, while also retaining its dominant position in global trade and payments, and as a reserve currency.

Dollar devaluation and dominance are not mutually exclusive goals but once you start to turn sentiment against your own currency you need to be careful.

Markets and investors cannot be turned on and off at will.

 

The golden era of policy co-ordination was the Plaza Accord in September 1985 when the G7 intervened to weaken the Dollar.

 

Then, at the Louvre Accord in February 1987 they decided that it had fallen far enough.

Comparisons have been drawn with then, with references to,

a Mar-a-Lago accord highlighting the Trump administration's desire to realign trade and currency markets.

Comparisons are false, as there is nothing co-ordinated about present events.

Passive diversification is evident. International investors may not be selling the Dollar aggressively. Instead, less of their net new assets are being directed into Dollars.

As the US has a large trade deficit, the net effect is a weaker currency.

After a prolonged period of Dollar strength such cyclical weakness may not be a surprise. This trend, however, looks likely to continue given policy uncertainty.

The latest concern is government debt...

The passage last week of President Trump's tax-cutting budget means a steep rise in the ratio of US debt to GDP. US Treasuries may be losing their status as a risk-free asset, with borrowing yields rising.

The "exorbitant privilege" is how the Dollar's role as reserve currency has been seen, helping the US to fund itself easily, with a quarter of its national debt held globally.

Given the Dollar's dominant role, the US Federal Reserve (FED) ability to act as a lender of last resort has been crucial. By providing Dollar liquidity during times of stress it helped to stabilize markets after crises, such as in 2008 or during the pandemic.

Now there is concern that the US may no longer be relied upon to fulfill this role.

If the markets feared that there would be no lender of last resort this would make them nervous and the Dollar less attractive. The alternative is a coalition of the willing.

One suggestion is,

for 14 central banks outside of the US who hold close to $2 trillion in US assets to make clear their willingness to act.

 

This risk is more perceived than real but highlights uncertainty weighing on the Dollar.
 

The Dollar will still have a dominant role, stemming from its political and economic might.

 

The Bretton Woods rules-based system, has the Dollar at its core and after next-year's mid-term elections the political dynamic in the US could change.

Even so,

a gradual shift away from Dollar reserves is already evident...!

At the end of 2024 the Dollar accounted for 58 per cent of global foreign exchange reserves versus 65 per cent a decade ago.

This shift is likely to intensify given current events. Despite this, the Dollar may dominate as it faces a lack of alternatives. In terms of global payments by value, it has no peer.

Society for Worldwide Interbank Financial Telecommunication (Swift) data shows that the current share of global payments is:

Dollar 49 per cent, euro 21.9 per cent, pound 6.6 per cent and Yuan 4.1 per cent.

This data overstates the euro's role because, excluding internal payments within the euro area, it is:

Dollar 59.1 per cent, euro 12.9 per cent and yen 5.6 per cent.

The pound falls to 4.9 per cent and the Yuan to sixth place and 2.9 per cent.

In contrast, the Yuan's role is seen as under measured because it has its own payments system and there is much use of bilateral swap lines.

China has successfully promoted the use of the Yuan, albeit from low levels. Unlike the Dollar there is a structural limitation to its use because it has a fixed capital account and it is not freely floating.
 

What lies ahead?

In times of significant change, markets often focus on managed or pegged currencies.

Currency deals may form part of tariff negotiations.

Several Asian currencies have rallied against the Dollar.

 

Facing deflation at home, China is likely to prioritize currency stability.

 

Others in Asia would worry about competitiveness if the Yuan weakened.

The Hong Kong Dollar has been successfully pegged to the US Dollar since 1983.

 

That is expected to continue, although the peg is now being tested to the upside, prompting intervention by the Hong Kong Monetary Authority to prevent appreciation.

One key area is, firms across emerging markets.

In the past decade new trade corridors have emerged across the global south with growing flows of goods, services, capital, investment and people.

This creates stronger arguments for invoicing trade in currencies other than the Dollar.

The more a country's trade is Dollar-invoiced, the more exposed it is to Dollar movements.

Some firms may now favor the Dollar while it weakens.

 

Conversely, for the first time in decades, those dealing with China may find it cheaper to borrow in Yuan than in Dollars for trade finance.
 

A crucial area to watch is the digital currency space.

China, along with Hong Kong, Thailand, the UAE and Saudi Arabia, continues to develop the mBridge system for low-cost cross-border trade.

Meanwhile, Trump has signed an executive order to build a strategic bitcoin reserve and position the US as a digital asset leader.

Attention is turning to stablecoins and their potential to support the Dollar's international role, especially by facilitating trade without the need to access banks or the Swift network.

The Dollar's decline looks likely to continue...!

Its dominance may take time to erode as there are no immediate challengers to supplant it but the likelihood is that we are in the early stages of moving to a multi-polar currency system.