Dollar Diminished: The Unmaking of US Financial Hegemony Under Trump

Abstract

The actions of the second Trump administration pose a serious threat to the dominance of the US dollar. Erratic US policies erode global trust in the United States and force states and private actors alike to reconsider their reliance on the dollar. This is reflected across three dimensions of dollar dominance: in trade and payments, as reserve currency and safe asset, and as global investment and funding currency. What distinguishes the current moment from previous predictions of a decline of financial hegemony is that the dollar’s global role is now challenged across all three dimensions simultaneously. Following the Global Financial Crisis, growing uneasiness with US financial power, especially the use of financial sanctions, already created cracks at the margins of the system and prompted a search for alternatives, triggering partial reserve diversification and de-dollarization of trade and payments systems. Under Trump, the undermining of the global economic order, growing fiscal deficits, and continued attacks on the institutional foundations of the administrative state are fundamentally undermining trust in the United States that is fundamental for the dollar’s global role. This signals a rupture in the US-centric global financial system, altering the foundations of the rules-based liberal international order (LIO). However, existing network effects slow down this process and no alternative can yet replace the dollar. The result is a financial interregnum where rising powers seek autonomy and influence without assuming hegemonic responsibility, leading to a more fragmented, multipolar financial order.