Trump effect? Investors looking beyond dollar, poll suggests trade war may trigger its decline

The US dollar has been a key part of the global financial system for a long time. However, with growing uncertainties about a possible second Trump administration, investors are now questioning its future. A Reuters survey, conducted between March 3-5, shows that currency experts expect a further drop in net-long dollar positions.

This suggests that confidence in the dollar is weakening. The report comes at a time when trade tensions are rising, monetary policies are changing and geopolitical uncertainty is increasing. All these factors could speed up the decline of the dollar’s dominance, fear investors and market watchers.

Trump’s trade policies and the dollar’s volatility

US President Donald Trump’s unpredictable trade policies—especially his tariffs on major trading partners—have previously shaken global markets. He imposed 25 per cent tariffs on imports from Canada and Mexico and additional levies on Chinese products, which strained economic ties and lowered investor confidence.

This uncertainty continues as investors worry about how a second Trump term might affect trade ultimately in the long run. According to Reuters, a mix of speculation and the unwinding of decade-high net-long dollar positions led to a nearly 2.5 per cent drop in the dollar index against major currencies in early March. The second Trump presidency has already raised concerns that protectionist policies could further weaken the dollar’s standing.

Investors rethink dollar’s safe-haven status

One of the biggest changes in global finance is the growing debate over the US dollar’s role as the world’s main reserve currency. Katie Martin, writing for the Financial Times, points out that more investors are now imagining a financial system where the US is not at the centre.

This concern comes from the political and economic instability caused by Trump’s policies, which have weakened international institutions and key alliances. Deutsche Bank analysts, as cited by Martin, warn that the dollar’s reputation as a safe-haven currency is fading. In the past, investors turned to the US dollar during economic crises, but now, they may start looking for alternatives.

The Federal Reserve’s monetary policy has also influenced investor confidence. According to Reuters, the dollar fell by 5 per cent after signs of economic weakness and expectations of three rate cuts by the end of the year. Kit Juckes of Societe Generale noted that global exposure to US assets is at an all-time high.

If investors start selling off these assets, the dollar’s value could drop sharply. Additionally, Trump’s previous attempts to pressure the Fed into cutting interest rates raise fears that a second term could bring policies that further weaken trust in the dollar and increase inflation risks.

Rise of the euro and alternative currencies

The US dollar still makes up over 57 per cent of global foreign exchange reserves, but the euro is becoming a strong alternative. As John Plender wrote in his piece ‘The demise of the dollar? Reserve currencies in the era of ‘going big’’ in the Financial Times on May 25 2021, the euro’s share of global reserves has grown to 20 per cent, partly due to dissatisfaction with US fiscal and monetary policies.

The European Union’s decision to engage in joint borrowing, especially during the Covid-19 crisis, has made the euro more appealing to reserve managers. If the EU strengthens its fiscal policies further, it could offer an even stronger alternative to the dollar.

Mansoor Mohi-uddin, chief economist at the Bank of Singapore, suggested in Katie’s that reserve managers might shift toward the euro quickly, which could gradually weaken the dollar’s dominance.

China is also working to reduce its dependence on the US dollar by promoting the yuan as a global currency. Through projects like the Belt and Road Initiative and trade agreements, China has increasingly encouraged its partners to use the yuan instead of the dollar for transactions.

If the second Trump administration escalates economic tensions with China even further than now, it could speed up efforts to move away from the dollar. Countries that fear US sanctions or tariffs may increasingly adopt other currencies further weakening the dollar’s global influence.

Could Trump weaken the dollar intentionally?

One controversial possibility is that Trump might try to weaken the US dollar on purpose. According to Katie, some of his economic advisers, including Stephen Miran, have called the dollar’s dominance a “burden”. A weaker dollar could help US manufacturing by making American exports cheaper and more competitive.

However, this would also lead to higher inflation, increase the cost of imports and create instability in global markets. If investors believe that Trump plans to weaken the dollar, they might move their money to other assets in advance causing the dollar to decline even faster.

Is the dollar’s decline inevitable?

Warnings about the US dollar losing its dominance are not new, but recent trends suggest this time could be different. As Plender notes, an IMF survey on foreign exchange reserves found that the dollar’s share dropped to 59 per cent in 2020, the lowest in 25 years.

This decline reflects a broader shift toward a multipolar currency system, much like the world moved away from the British pound after World War II. While the dollar is not expected to lose its top position overnight, its dominance is no longer secure.

Although the dollar is still the leading global currency, the financial scenario is changing. Investors who once relied on the dollar without question are now considering alternatives. Whether this shift happens slowly or accelerates, one thing is certain: US financial dominance is facing its biggest challenge in decades.