The U.S. dollar has long served as the bedrock of the international financial system—a currency that grants Washington unmatched power to borrow cheaply, exert global influence, and sustain its economy through deficits that would cripple most nations. This advantage, famously called America’s “exorbitant privilege,” has allowed the United States to operate as both banker and enforcer of the global economy. Yet under Donald Trump’s escalating trade war and economic nationalism, that privilege faces unprecedented strain. A policy designed to protect American industry and jobs now threatens to undermine the very foundation of U.S. global power: the supremacy of the dollar.
The mechanics of America’s “exorbitant privilege”
Since the end of World War II, the U.S. dollar has anchored global trade and finance. Central banks across the world hold U.S. Treasury securities as reserves, international contracts are settled in dollars, and commodities from oil to wheat are priced in greenbacks. This centrality gives Washington extraordinary advantages: it can finance vast deficits at low cost, influence global capital flows, and impose financial sanctions that reach far beyond its borders. In short, global confidence in the dollar allows America to live beyond its means while maintaining control over the arteries of international commerce.
The term “exorbitant privilege” was first coined by French President Valéry Giscard d’Estaing in the 1960s to describe how the U.S. could borrow from the world in its own currency while others had to earn or buy dollars. The privilege is not just financial—it is strategic. Every time another nation settles a trade in dollars or buys a Treasury bond, it reinforces American influence. The network effect of this system means the dollar remains the world’s default language of finance even when U.S. policies stumble.
But this privilege comes with responsibilities. The global economy expects the U.S. to provide stability—predictable trade policies, credible fiscal management, and openness to global markets. When these elements waver, confidence erodes. Trump’s trade war has begun to chip away at this confidence by introducing uncertainty, weaponizing tariffs, and redefining global trade relationships in ways that make holding dollars less necessary and, in some cases, less desirable.
How protectionism threatens dollar demand
The Trump administration’s protectionist agenda—built around “America First” tariffs, punitive trade measures, and frequent threats of economic retaliation—has begun to reduce global demand for dollars. When the U.S. restricts imports and fractures supply chains, it reduces the number of cross-border transactions that are denominated in its currency. Each barrier to trade weakens the natural flow of dollars through the global system. As fewer goods are traded in dollars, fewer countries feel the need to hold large reserves of them, subtly undermining the foundation of dollar dominance.
This effect is compounded by the administration’s desire for a weaker dollar to shrink the trade deficit. Some of Trump’s economic advisers, including those advocating “managed trade,” argue that the dollar’s global reserve status contributes to persistent deficits because it keeps the currency overvalued. According to this logic, reducing global reliance on the dollar could make U.S. exports more competitive. Yet, in practice, a weaker dollar born from declining confidence is not a sign of strength—it signals structural retreat. The short-term trade benefits would be far outweighed by long-term financial costs.
In addition, trade wars alter investor psychology. The dollar’s value is sustained not merely by U.S. productivity or interest rates, but by trust in its stability and openness. When investors perceive that Washington is willing to weaponize trade or abandon global norms, the dollar begins to lose its status as the ultimate safe haven. The more the United States uses tariffs and sanctions as blunt instruments, the more the world looks for alternatives. Each tariff may protect a domestic industry, but collectively they erode the sense of security that sustains global dollar demand.
The risk of losing the world’s safe asset
The cornerstone of dollar dominance is the U.S. Treasury market—the world’s deepest, most liquid pool of risk-free assets. Nations, corporations, and investors park their reserves in Treasuries because they trust the stability of the U.S. economy and the predictability of its institutions. But Trump’s policies are shaking that foundation. By blurring the line between economic policy and political impulse, the administration risks transforming U.S. debt from a global haven into a source of uncertainty.
When the dollar and Treasury bonds no longer move in opposite directions during crises—a key characteristic of safe-haven assets—markets begin to question whether the United States still plays its stabilizing role. Episodes in which U.S. stocks, bonds, and the dollar all fell simultaneously after tariff announcements suggest this confidence is already fraying. Investors accustomed to fleeing to Treasuries in times of turmoil now see the U.S. itself as a source of volatility.
The implications are far-reaching. If foreign governments and investors begin to diversify away from Treasuries, U.S. borrowing costs will rise. Higher yields on government debt would ripple across the economy, raising the cost of mortgages, corporate financing, and public spending. America’s debt-to-GDP ratio, already over 120%, would become more difficult to sustain. The very privilege that has allowed Washington to finance wars, tax cuts, and stimulus packages at low cost could vanish, forcing an adjustment that would reverberate through the global economy.
Global realignment and the search for alternatives
While the dollar remains dominant, cracks are beginning to appear. Its share of global foreign-exchange reserves has fallen from about 74% at the turn of the century to under 60% today. Emerging economies, wary of U.S. sanctions and trade disruptions, are experimenting with alternative arrangements—from yuan-settled energy deals to digital-currency payment systems. The European Union’s plans for common defense and fiscal instruments could, over time, lead to the creation of euro-denominated bonds that rival Treasuries in safety and liquidity.
China, despite its capital controls, is quietly positioning the yuan for a larger role in global finance. Its Belt and Road partners increasingly settle trade in renminbi, and its central bank is exploring digital payment platforms that bypass traditional dollar channels. The U.S. trade war has only accelerated this shift by motivating countries to insulate themselves from dollar exposure. For now, no single currency can replace the dollar—but a diversified system with multiple strong regional currencies would still weaken America’s dominance and reduce its leverage.
The trade war has also reshaped perceptions of financial security. Nations that once relied on the dollar as a hedge against global shocks now see it as part of the problem. By disrupting global supply chains and distorting commodity markets, U.S. tariffs have reduced the correlation between the dollar and global stability. The more the dollar becomes a reflection of domestic politics rather than economic fundamentals, the less it functions as an anchor for the world economy.
The self-defeating logic of Trump’s dollar delusion
At the heart of Trump’s economic strategy lies a contradiction. His administration wants both a stronger industrial base and a weaker currency; both global dominance and domestic protectionism. But the policies designed to achieve one undermine the other. The trade war may temporarily reduce imports and narrow the trade deficit, but it also discourages investment, raises consumer costs, and isolates the U.S. from the global system that sustains its financial power. By trying to “fix” trade imbalances, Washington risks dismantling the very ecosystem that made America the center of world finance.
Moreover, the dollar’s strength is not simply an economic artifact—it is a symbol of trust in the U.S. political system, legal institutions, and openness. When that trust erodes, rebuilding it is nearly impossible. Should global investors come to view the United States as unpredictable or hostile to its trading partners, they will gradually diversify away. The erosion may unfold quietly—one trade deal, one tariff, one diversification at a time—but its cumulative impact could redefine global finance within a decade.
Trump’s dollar delusion rests on a dangerous misunderstanding: that America can wall itself off from the world and still retain the privileges of global leadership. In reality, the dollar’s supremacy is as much about cooperation as control. The trade war’s tariffs, coupled with erratic policy signals and political brinkmanship, risk doing what no rival power has yet achieved—undermining the dollar from within. If that happens, the United States will find that the true cost of protectionism is not a temporary trade slowdown, but the irreversible loss of its financial empire.
(Source:www.theguardian.com)
The mechanics of America’s “exorbitant privilege”
Since the end of World War II, the U.S. dollar has anchored global trade and finance. Central banks across the world hold U.S. Treasury securities as reserves, international contracts are settled in dollars, and commodities from oil to wheat are priced in greenbacks. This centrality gives Washington extraordinary advantages: it can finance vast deficits at low cost, influence global capital flows, and impose financial sanctions that reach far beyond its borders. In short, global confidence in the dollar allows America to live beyond its means while maintaining control over the arteries of international commerce.
The term “exorbitant privilege” was first coined by French President Valéry Giscard d’Estaing in the 1960s to describe how the U.S. could borrow from the world in its own currency while others had to earn or buy dollars. The privilege is not just financial—it is strategic. Every time another nation settles a trade in dollars or buys a Treasury bond, it reinforces American influence. The network effect of this system means the dollar remains the world’s default language of finance even when U.S. policies stumble.
But this privilege comes with responsibilities. The global economy expects the U.S. to provide stability—predictable trade policies, credible fiscal management, and openness to global markets. When these elements waver, confidence erodes. Trump’s trade war has begun to chip away at this confidence by introducing uncertainty, weaponizing tariffs, and redefining global trade relationships in ways that make holding dollars less necessary and, in some cases, less desirable.
How protectionism threatens dollar demand
The Trump administration’s protectionist agenda—built around “America First” tariffs, punitive trade measures, and frequent threats of economic retaliation—has begun to reduce global demand for dollars. When the U.S. restricts imports and fractures supply chains, it reduces the number of cross-border transactions that are denominated in its currency. Each barrier to trade weakens the natural flow of dollars through the global system. As fewer goods are traded in dollars, fewer countries feel the need to hold large reserves of them, subtly undermining the foundation of dollar dominance.
This effect is compounded by the administration’s desire for a weaker dollar to shrink the trade deficit. Some of Trump’s economic advisers, including those advocating “managed trade,” argue that the dollar’s global reserve status contributes to persistent deficits because it keeps the currency overvalued. According to this logic, reducing global reliance on the dollar could make U.S. exports more competitive. Yet, in practice, a weaker dollar born from declining confidence is not a sign of strength—it signals structural retreat. The short-term trade benefits would be far outweighed by long-term financial costs.
In addition, trade wars alter investor psychology. The dollar’s value is sustained not merely by U.S. productivity or interest rates, but by trust in its stability and openness. When investors perceive that Washington is willing to weaponize trade or abandon global norms, the dollar begins to lose its status as the ultimate safe haven. The more the United States uses tariffs and sanctions as blunt instruments, the more the world looks for alternatives. Each tariff may protect a domestic industry, but collectively they erode the sense of security that sustains global dollar demand.
The risk of losing the world’s safe asset
The cornerstone of dollar dominance is the U.S. Treasury market—the world’s deepest, most liquid pool of risk-free assets. Nations, corporations, and investors park their reserves in Treasuries because they trust the stability of the U.S. economy and the predictability of its institutions. But Trump’s policies are shaking that foundation. By blurring the line between economic policy and political impulse, the administration risks transforming U.S. debt from a global haven into a source of uncertainty.
When the dollar and Treasury bonds no longer move in opposite directions during crises—a key characteristic of safe-haven assets—markets begin to question whether the United States still plays its stabilizing role. Episodes in which U.S. stocks, bonds, and the dollar all fell simultaneously after tariff announcements suggest this confidence is already fraying. Investors accustomed to fleeing to Treasuries in times of turmoil now see the U.S. itself as a source of volatility.
The implications are far-reaching. If foreign governments and investors begin to diversify away from Treasuries, U.S. borrowing costs will rise. Higher yields on government debt would ripple across the economy, raising the cost of mortgages, corporate financing, and public spending. America’s debt-to-GDP ratio, already over 120%, would become more difficult to sustain. The very privilege that has allowed Washington to finance wars, tax cuts, and stimulus packages at low cost could vanish, forcing an adjustment that would reverberate through the global economy.
Global realignment and the search for alternatives
While the dollar remains dominant, cracks are beginning to appear. Its share of global foreign-exchange reserves has fallen from about 74% at the turn of the century to under 60% today. Emerging economies, wary of U.S. sanctions and trade disruptions, are experimenting with alternative arrangements—from yuan-settled energy deals to digital-currency payment systems. The European Union’s plans for common defense and fiscal instruments could, over time, lead to the creation of euro-denominated bonds that rival Treasuries in safety and liquidity.
China, despite its capital controls, is quietly positioning the yuan for a larger role in global finance. Its Belt and Road partners increasingly settle trade in renminbi, and its central bank is exploring digital payment platforms that bypass traditional dollar channels. The U.S. trade war has only accelerated this shift by motivating countries to insulate themselves from dollar exposure. For now, no single currency can replace the dollar—but a diversified system with multiple strong regional currencies would still weaken America’s dominance and reduce its leverage.
The trade war has also reshaped perceptions of financial security. Nations that once relied on the dollar as a hedge against global shocks now see it as part of the problem. By disrupting global supply chains and distorting commodity markets, U.S. tariffs have reduced the correlation between the dollar and global stability. The more the dollar becomes a reflection of domestic politics rather than economic fundamentals, the less it functions as an anchor for the world economy.
The self-defeating logic of Trump’s dollar delusion
At the heart of Trump’s economic strategy lies a contradiction. His administration wants both a stronger industrial base and a weaker currency; both global dominance and domestic protectionism. But the policies designed to achieve one undermine the other. The trade war may temporarily reduce imports and narrow the trade deficit, but it also discourages investment, raises consumer costs, and isolates the U.S. from the global system that sustains its financial power. By trying to “fix” trade imbalances, Washington risks dismantling the very ecosystem that made America the center of world finance.
Moreover, the dollar’s strength is not simply an economic artifact—it is a symbol of trust in the U.S. political system, legal institutions, and openness. When that trust erodes, rebuilding it is nearly impossible. Should global investors come to view the United States as unpredictable or hostile to its trading partners, they will gradually diversify away. The erosion may unfold quietly—one trade deal, one tariff, one diversification at a time—but its cumulative impact could redefine global finance within a decade.
Trump’s dollar delusion rests on a dangerous misunderstanding: that America can wall itself off from the world and still retain the privileges of global leadership. In reality, the dollar’s supremacy is as much about cooperation as control. The trade war’s tariffs, coupled with erratic policy signals and political brinkmanship, risk doing what no rival power has yet achieved—undermining the dollar from within. If that happens, the United States will find that the true cost of protectionism is not a temporary trade slowdown, but the irreversible loss of its financial empire.
(Source:www.theguardian.com)
