Investors fleeing dollar; is the supremacy of the US currency in danger?

The US currency has had its weakest first half of the year since 1973, as the US Dollar Index, a measure of the value of the US currency against a basket of six other currencies, fell more than 10%, according to the Financial Times.

The reasons for the dollar's decline are complex, with a focus on the slowing US economy, expectations of a rate cut by the Federal Reserve and political instability exacerbated by US President Donald Trump's rhetoric, along with frequent changes in trade tariffs applied to virtually all countries, according to an article published in Finance Magnates earlier this week.

Many Wall Street analysts believe that the dollar's decline has long been inevitable, and in recent times bets on the depreciation of the US currency have become some of the most popular trades globally, writes Fortune.

Bill Sterling, global strategist at GW&K Investment Management, suggests that the "Sell America” bet still has potential. "Overall, there's plenty of room for the dollar to continue to fall,” said Sterling, a former global chief economist at Merrill Lynch.

The strategist points out that foreigners have financed the U.S.'s massive deficit over the past few decades by buying U.S. assets - stocks, Treasuries, dollars, etc. The Republican spending bill doesn't appear to change the trajectory of the national debt, but it does include provisions that would raise taxes on foreign capital coming from several major U.S. trading partners. "At a time when we have a deficit of 7% of GDP and we need foreign capital to finance it, to consider measures that discourage capital inflows is almost a recipe for a weak dollar,” Sterling said, as quoted by Fortune.

Finance Magnates writes that the policies promoted by Donald Trump have had a significant impact on the position and perception of the dollar in global markets, as his unpredictable attitude in economic and foreign policy has contributed to increasing uncertainty among international investors.

Trump has repeatedly criticized the Federal Reserve and its chairman, Jerome Powell, attacks that have raised concerns about the independence of the central bank, an essential feature for economic stability and confidence in the national currency. In addition, protectionist trade policies and the use of sanctions as an instrument of geopolitical pressure have led several countries to seek alternatives to the dollar, accelerating the process of dedollarization. This context has contributed to the gradual weakening of the dollar's position as the main reserve currency worldwide, the source also notes.

• Deterioration of confidence in the dollar

The dollar's decline in the global economy no longer seems to be temporary, as more and more countries and investors seek to reduce their dependence on the US currency, a process known as dedollarization, writes Finance Magnates.

According to recent surveys conducted by the Official Forum of Monetary and Financial Institutions, in 2025, about 70% of market participants said that they no longer want to invest in the dollar due to the increasing geopolitical risks associated with US policy. By comparison, last year, only 31% held this opinion, which indicates a sharp deterioration in confidence in the dollar in a single year.

Instead of the dollar, investors are turning to other assets, such as gold, which is once again perceived as a safe haven asset in times of uncertainty. In addition, about 16% of respondents plan to increase the share of the euro in their portfolios, according to the survey, more than twice as much as in 2024, when only 7% did so. This reflects the strengthening of the euro as a serious alternative to the dollar, especially in the context of improving economic conditions in the European Union and the stabilization of the European Central Bank's policy, according to Finance Magnates.

Central banks are also reducing the share of the dollar in their foreign exchange reserves, which has fallen to 58%, the lowest level in recent decades. At the same time, the importance of other currencies and gold is growing.

In addition to financial indicators, dedollarization is also evident in intergovernmental relations. The BRICS countries (Brazil, Russia, India, China and South Africa) and other economies have begun to conclude bilateral trade agreements with settlements in national currencies, bypassing the dollar, which not only reduces transaction costs but also helps mitigate the impact of sanctions imposed by the United States, the aforementioned publication also notes.

• Christine Lagarde: There is an opportunity for the euro to become a global currency

There is no major challenge to the dollar's status as the preferred global reserve currency in the near future, according to the views of central bankers attending the annual conference in the Portuguese resort of Sintra, which took place from June 30 to July 2, writes Reuters.

European Central Bank President Christine Lagarde, who argued that the euro could eventually become an alternative to the dollar if the euro zone adopted the necessary reforms, said that 2025 could be seen in the future as a "turning point” in this regard. "(But) for a major change to take place it will take a lot of time and a lot of effort,” Lagarde said in Portugal.

She noted that "investors are looking at different options” in a climate marked by uncertainty and unpredictability, adding that there is evidence that the euro is benefiting from this situation. "It's not going to happen overnight. It's never happened like that historically. But it's clear that something has broken down. Whether it can be fixed or whether it will stay that way remains to be seen,” she said.

Bank of Japan Governor Kazuo Ueda said any significant change would depend on structural reforms. "To a certain extent, it all depends on what regions like Europe or China do to improve the efficiency or attractiveness of their currencies,” he said, citing efforts to integrate capital markets in the eurozone as an example.

And Bank of England Governor Andrew Bailey said a change in the dollar's status was still a long way off. "I don't see... any kind of major change at the moment,” he said, arguing that any reserve currency needs to provide a supply of safe assets on the market that can be used as collateral and for security.

Bank of Korea Governor Rhee Chang-yong said the prospect of a long-term shift in stance on the dollar was a topic of discussion for some, even as they continued to hold dollars. "It seems like people are talking about it. But right now, they are maintaining their dollar exposure while increasing their currency hedging,” the Korean banker said.

Reuters also reports that Lagarde recently told an audience in Berlin that there was an opportunity for the euro to become a global currency "if it can earn its place.” She said Europe would need to build a deeper and more liquid capital market, strengthen its legal framework and back up its commitment to open trade with security capabilities.

Although the dollar's share of international reserves is now at its lowest level in decades, its 58% share remains well above that of the euro, which is only 20%, according to Reuters. Even if the dollar's status as the world's main currency is not currently threatened, the world is moving towards a more multipolar currency system, in which the euro, the Chinese yuan and central bank digital currencies (CBDCs) will be used alongside the dollar, which will obviously erode the dollar's dominant influence, writes Finance Magnates.