The U.S. Is Losing Investor Confidence—But the Dollar Remains Irreplaceable

As recently as last year, the United States appeared to be the undisputed leader among countries attractive to international investors. The strength of the American economy, contrasted with the sluggish recovery elsewhere, pushed the dollar up nearly 10% by the fall of 2024. Up until Donald Trump’s inauguration and during the first weeks of his presidency, key economic indicators and the labor market remained stable, while inflation steadily declined toward the Federal Reserve’s target of around 2%.

But following his return to the White House, Trump began to erode investor confidence—both domestically and abroad. On April 2, he proclaimed "Liberation Day," marking the introduction of universal tariffs on imports from all of America’s trading partners. The move disrupted global supply chains and triggered turmoil in financial markets.

Although the White House later partially rolled back or softened the harshest measures, the damage was already done. The resulting uncertainty in global trade darkened the economic outlook for the remainder of the year—particularly for the United States, as the tariffs apply to virtually the entire volume of its external trade.

Against this backdrop, expectations have grown that the Federal Reserve may be forced to cut interest rates before the end of the year to support the economy. One immediate consequence has been a correction in the dollar’s value—it has returned to its September 2024 level, erasing the gains from the fall.

Recent developments have cast doubt even on the dollar’s traditional role as a safe haven for international capital. For the past two decades, every wave of economic or financial turmoil has prompted a flight to safety—primarily into U.S. assets. In each case, demand for U.S. Treasuries surged, buoyed by confidence in the American economy, high issuance volumes, and strong liquidity.

Rising demand for Treasuries typically led to higher bond prices and lower yields, easing borrowing costs for both the government and American consumers. At the same time, demand for the dollar would increase, pushing its value upward.

But after Trump’s tariff announcement, markets responded differently. In a climate of unease, investors favored alternatives over dollar-denominated assets—particularly Japanese government bonds and gold. Unlike in recent crises, yields on U.S. debt rose, especially on 10-year Treasuries, which serve as a benchmark for auto loans, mortgages, and business credit in the U.S.

Moreover, the dollar—which typically appreciates during periods of instability—has instead begun to weaken against other major currencies.

Trump’s economic agenda—his attacks on the Federal Reserve’s independence and the erosion of the rule of law in the United States—has jeopardized not only the dollar’s short-term standing on global markets, but also the institutional framework that has underpinned its dominance for over a century. These developments have triggered a broader reassessment of the dollar’s role as the world’s primary medium of exchange, unit of account, and reserve currency. Notably, Trump himself has floated the idea of deliberately weakening the dollar with support from foreign governments, in an effort to boost U.S. exports—highlighting the scale of the disruption.

Still, despite long-standing hopes among both allies and adversaries of the U.S., the "fall" of the dollar remains unlikely—unless other economies seize the moment. For now, they appear unprepared. Even as Washington’s standing weakens, investment assets in other major economies—including China, Japan, and the eurozone—continue to look less attractive compared to those in the U.S.

The breakdown of legal predictability and the erratic nature of economic policymaking under Trump are already cause enough for foreign governments and central banks to reconsider their reliance on the dollar as both a settlement and reserve currency. Heightening the concern is Trump’s pressure on the Federal Reserve: not only has he called for aggressive rate cuts, but he has also signaled his intent to appoint loyalists willing to implement politically favorable monetary and regulatory policy.

That constitutes a direct threat to the independence of the U.S. central bank—one of the foundational pillars supporting the long-term value of the dollar. Undermining that independence calls into question the Fed’s ability to fulfill its mandate: to maintain price stability and sustainable employment. And it is precisely those metrics that underpin international confidence in the dollar.

In many cases, slow growth is the primary constraint, reducing asset yields and investor interest. In China, capital controls and the lack of an independent central bank remain fundamental barriers. Meanwhile, Europe faces internal political instability that continues to erode confidence in the durability of the eurozone itself.

Within the eurozone, progress toward deeper economic and financial integration has largely stalled in recent years. In fact, leading member states have shifted politically to the right—toward populism—raising the risk of internal volatility. Widening fiscal deficits in major economies within the bloc have further dampened investor confidence in the eurozone’s ability to sustain long-term growth.

China, for its part, is increasingly forced to confront its own structural weaknesses. The ongoing real estate crisis continues to weigh on the broader economy. Financial risks—rooted in an overreliance on fixed investment and bank lending—have become more pronounced. The country also faces growing deflationary pressures, as industrial capacity outpaces domestic demand. Public and private sector confidence in the government’s economic stewardship has declined sharply.

Moreover, China struggles to win the trust of global investors: its institutional environment remains fragile, with the Communist Party maintaining sweeping control over the economy, judiciary, and political system.

A key question remains: does the early-year capital outflow from dollar-denominated assets signal the start of a lasting trend—or is it simply a short-term reaction to macroeconomic and technical developments? Following Trump’s tariff announcement, analysts revised down U.S. growth and interest rate forecasts, prompting hedge funds to unwind heavily leveraged positions in Treasuries. At the same time, macro expectations shifted: investors began demanding higher yields on government debt, reflecting concerns about future inflation. Given both the projected trajectory of the already massive U.S. federal debt and the inflationary pressures stemming from new tariffs, the rise in yields appears rational—even amid signs of economic slowdown, which would typically support lower yields.

The shift toward non-U.S. assets may also reflect a basic principle of portfolio diversification. Both private and official foreign investors—including central banks and sovereign wealth funds—are unlikely to view holding more than 50% of their portfolios in a single country’s securities or currency as prudent. Such concentration increases vulnerability to economic, financial, and geopolitical shocks—risks that have intensified under Trump. In this context, greater interest in non-dollar assets may be driven less by collapsing trust in the greenback than by a desire for a more balanced global investment structure.

Yet the potential for a full-scale pivot remains limited: most other currencies and financial markets lack the necessary depth (a sufficient volume of high-quality assets) and liquidity (the ability to quickly buy and sell those assets) to absorb major capital flows. Likewise, despite technological advances that make cross-border transactions more seamless and investors’ growing appetite for diversification, there is still little evidence that the dollar is losing its dominant role in global trade and payments. For now, it retains a decisive lead over all other currencies.

That lead, however, is narrowing. History suggests that realignments in the global financial system may unfold gradually—until they don't. The way Trump has been eroding U.S. institutional credibility could accelerate such a shift. It was precisely the strength of those institutions that underpinned the dollar’s dominance and sustained investor confidence—both domestic and international—in the U.S. financial system.

While the dollar’s position at the top of the global monetary hierarchy appears increasingly vulnerable, a lack of credible alternatives continues to shield it from true displacement. As before, its resilience stems not from U.S. exceptionalism but from persistent structural, political, and institutional weaknesses elsewhere. So long as those weaknesses endure, the dollar will be afforded privileges that no other currency could realistically enjoy.