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U.S. dollar losing grip as tariff shock ripples through markets

Published: 22 Apr. 2025, 00:03

Ha Hyun-ock

The author is an editorial writer at the JoongAng Ilbo.

The dominance of the U.S. dollar, long seen as a pillar of global finance, is showing signs of strain. Even during past crises such as the 2008 financial crisis or the 2011 credit rating downgrade, the dollar and U.S. Treasury bonds retained their appeal as safe haven assets. But under U.S. President Donald Trump’s second term tariff offensive, that trust appears to be fraying.

Markets responded swiftly after Trump ramped up his protectionist policy on April 2, branding the announcement “Liberation Day” and slapping reciprocal tariffs on 47 countries. The dollar began sliding. The U.S. Dollar Index, which tracks the greenback against six major currencies, fell below the key threshold of 100 on April 11, reversing a previous upward trend.

An exterior view of the New York Stock Exchange and the ″Fearless Girl″ statue in the Financial District of New York City on April 8, 2025. [AFP/YONHAP]

The bond market, traditionally a barometer of economic stability, has also been rattled. Uncertainty from escalating trade tensions sent risk assets tumbling. But unlike previous shocks, U.S. Treasurys — the world’s go-to safe asset — also came under pressure. Yields, which move inversely to prices, spiked. The 10-year Treasury yield jumped to 4.5 percent on April 9 from the mid-3.8 percent range just days earlier. The 30-year yield came close to breaching 5 percent.

Analysts point to a range of causes, including potential Chinese selling of U.S. Treasurys in retaliation, unwinding of basis trades, and margin calls triggered by equity declines. But the core issue is a weakening belief in the safety and value of dollar-denominated assets.

“The recent moves suggest investors are beginning to shun dollar-based assets,” former U.S. Treasury Secretary Janet Yellen said in a CNBC interview on April 14. “That raises fundamental questions about the reliability of U.S. Treasurys, which underpin the global financial system.”

The implications go beyond market volatility. A sustained loss of faith in the dollar and U.S. debt would undermine the very structure of global finance. The current system is built on the assumption that the dollar is stable and U.S. government debt is risk-free. When those assumptions erode, capital tends to flee.

U.S. Treasury Secretary Scott Bessent and White House press secretary Karoline Leavitt speak with the media about tariffs at the White House in Washington on April 9, 2025. [REUTERS/YONHAP]

Historically, the U.S. has benefited from what economists call “exorbitant privilege.” As the issuer of the world’s primary reserve currency, the U.S. enjoys seigniorage — the ability to borrow cheaply and print money with minimal inflationary consequences. This allowed Washington to finance growing deficits with relative ease.

According to the U.S. Treasury, the national debt stood at $36.2 trillion as of February. The Congressional Budget Office projects that federal debt will reach 100 percent of GDP by the end of 2024. Despite this, the U.S. has maintained low borrowing costs thanks to global demand for Treasurys — particularly from trade surplus countries like China and Japan, which recycle export earnings into U.S. debt.

But Trump’s tariff escalation threatens to upend this system of “dollar recycling.” If countries begin to reduce their purchases of U.S. bonds, yields will rise, increasing borrowing costs. The strain is already visible. The Financial Times reports that Treasury interest payments alone reached $1.13 trillion in the current fiscal year. Bloomberg estimates the United States must issue $2 trillion in new debt this year and refinance $8 trillion in maturing bonds.

In this environment, even a slight increase in bond yields leads to a significant rise in borrowing costs. The Economist noted that even if tariffs raise government revenue, the gains are marginal compared to the burden of higher debt-servicing costs.

Higher bond yields also push up mortgage rates and corporate borrowing costs, creating ripple effects across the economy. The bond market has become a pressure point — and a potential vulnerability — for both Trump and the U.S. economy. That may explain Trump’s decision to delay the reciprocal tariffs by 90 days after markets entered what analysts dubbed a “bond tantrum.”

While the deferral calmed markets temporarily, many warn that volatility could return. The Republican Party continues to push for aggressive tax cuts, which could further widen fiscal deficits. Unless matched by investor demand, more debt issuance risks sparking another sharp rise in yields.

Some economists are even drawing parallels to the so-called Truss moment. In 2022, then-British Prime Minister Liz Truss resigned just 44 days into her term after her minibudget triggered market turmoil. Bond vigilantes — investors who sell government bonds in protest of reckless fiscal policy — may similarly test Trump’s resolve.

Foreign selling is also a looming risk. As of February, foreign entities held $8.82 trillion in U.S. Treasurys — about 30 percent of the total. Japan remains the largest holder at $1.13 trillion, followed by China at $784.3 billion, Britain, Belgium and France.

While there’s speculation that China could dump U.S. bonds in retaliation, most analysts view this as unlikely in the short term. Doing so would result in large capital losses and could drive up the value of the Chinese currency, the renminbi, undermining China’s export competitiveness.

Still, investment flows are shifting. Zhaopeng Xing, chief strategist at Alpine Macro, told CNBC that China has started redirecting funds toward eurozone bonds. U.S. Treasury data also show that in January, foreign institutions sold $19.6 billion in long-term Treasurys while buying $61.6 billion in short-term debt — suggesting a preference for liquidity amid rising uncertainty.

Signage is pictured at the U.S. Treasury headquarters in Washington. [REUTERS/YONHAP]

Meanwhile, the U.S. dollar’s role as the dominant reserve currency is also slipping. According to the International Monetary Fund, the dollar’s share of global foreign exchange reserves has declined from 70 percent in 2000 to 58 percent recently. As countries like China begin to settle oil trades in renminbi and BRICS nations explore alternatives to the dollar, the “petrodollar” system that has underpinned U.S. hegemony is being challenged.

The New York Times warned that Trump’s tariff threats could ultimately destabilize the dollar’s status as the world’s reserve currency. Ray Dalio, founder of Bridgewater Associates, said, “We are in the early stages of a reshuffling of the global monetary order,” pointing to rising debt and deepening cracks in capital markets.

The full impact of Trump’s tariff campaign remains uncertain. But the signal from markets is clear: The era of unquestioned dollar supremacy may be drawing to a close.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.