To The Moon

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For nearly eight decades, the U.S. dollar has stood unrivaled as the world’s reserve currency. It lubricates global commerce, anchors central bank reserves, and acts as the primary unit of account for trade settlements. Yet, in 2025, the pillars underpinning dollar dominance appear less certain than ever. From China’s quiet push for local currency trade, to rising inflation fueled by tariffs, to foreign investors cutting exposure to U.S. assets—the world’s relationship with the greenback is shifting.

This transformation is not a sudden crisis but a steady erosion of confidence, accelerated by policy missteps and global realignments. To understand where the dollar is heading, and what this means for global investors, we must revisit the role of reserve currencies, assess the impact of U.S. trade wars, and analyze the financial consequences of a potential dollar devaluation.

A Brief History of Dollar Dominance

The U.S. dollar achieved global reserve status in the aftermath of World War II, when the 1944 Bretton Woods agreement established the greenback as the anchor of the international monetary system. Backed by America’s industrial strength and gold convertibility, the dollar became the preferred medium of trade. Even after the Nixon administration ended the gold standard in 1971, confidence in the U.S. financial system and its deep, liquid Treasury market kept the dollar at the heart of global commerce.

By the 1980s, the dollar’s supremacy was cemented: nearly 90% of global trade invoices and more than 60% of central bank reserves were denominated in dollars. Even today, around 80% of trade in the Americas and over 70% in Asia is still conducted in U.S. currency. But the structural advantages that once made the dollar unassailable are now under threat.

The Reserve Currency Ideal—and Its Modern Failings

A reserve currency is supposed to embody three traits: stability, liquidity, and trust. It should hold its value, provide deep markets for investment, and inspire confidence across borders. Yet the dollar’s volatility in recent years raises questions about whether it continues to meet those criteria.

Since January 2025, the dollar has fallen nearly 10%. For American consumers, this translates into higher import prices. For global exporters, it means holding dollars has become a risky proposition—what was once considered a safe store of value now erodes purchasing power at an alarming rate.

This shift has accelerated a trend toward local currency trade. Exporters from Asia, Latin America, and the Middle East increasingly demand settlements in yuan, pesos, euros, or other currencies that shield them from dollar depreciation. For countries reliant on exports, holding greenbacks now carries more risk than reward.

The Trump Tariff War and Its Unintended Consequences

The catalyst for today’s dollar challenges can be traced back to the tariff war under former President Donald Trump. Initially framed as a strategy to correct trade imbalances and protect U.S. industries, the tariffs introduced cascading costs across the global supply chain.

Washington’s official narrative was that exporters—particularly China—would absorb the tariffs by cutting prices, leaving American consumers relatively unaffected. In reality, the opposite occurred. Tariffs inflated costs, companies passed expenses onto U.S. buyers, and inflation began to creep upward.

• Wholesale inflation has risen at its fastest pace in three years.

• Producer prices jumped more than 3% year-over-year.

• Corporate margins shrank as import costs surged.

• Effective tariff rates now stand near 16%, implying further upward pressure on prices for quarters to come.

This has undermined one of the dollar’s most important features: price stability. Exporters now face a painful trade-off—sell into U.S. markets and risk shrinking margins, or bypass the dollar altogether in favor of more stable bilateral agreements.

China’s Strategic Push Toward De-Dollarization

No country has capitalized on this moment more effectively than China. Despite global trade slowing, Chinese exports grew 6.1% year-to-date, with the country’s trade surplus ballooning to $683 billion—a 32% jump from the previous year.

Much of this trade is no longer dollar-denominated. China has expanded the use of the renminbi in settlements across Asia, Africa, and South America. Bilateral currency swaps, yuan-based clearing systems, and cross-border digital payment platforms are all part of Beijing’s long-term strategy to weaken reliance on the greenback.

This is not simply opportunistic policy—it is a calculated response to America’s use of the dollar as a geopolitical weapon. Sanctions, tariffs, and financial restrictions have incentivized trading partners to seek alternatives. As China’s role in global supply chains deepens, so too does the appeal of settling trade outside of U.S. dollars.

Inflation, Rates, and the Dollar Trap

For Treasury Secretary Scott Besson, the policy dilemma is acute. Inflationary pressures are intensifying, corporate bankruptcies are climbing, and the U.S. economy shows signs of slowing. Yet the proposed solution—cutting interest rates by 175 basis points—risks worsening the very problem it seeks to address.

Lower rates may provide short-term relief by reducing borrowing costs, enabling companies to refinance debt and consumers to spend. However, in a tariff-driven inflationary environment, cutting rates does little to reduce costs. Instead, it weakens the dollar further, fuels capital outflows, and raises the risk of stagflation.

Core CPI is now back above 3%, while producer price inflation has reached its hottest levels since 2022. Injecting more liquidity into this environment risks creating what economists call an “inflationary feedback loop”—where weak currency, higher import prices, and accommodative monetary policy feed into each other in a self-reinforcing cycle.

Capital Flight: Investors Begin to Exit Dollar Assets

The greatest risk lies not only in trade flows but in financial markets. Foreign investors have begun reducing exposure to U.S. assets at a scale not seen in decades. The Ontario Teachers’ Pension Plan, one of the largest in Canada, recently cut its dollar exposure by $51 billion—more than half of its previous allocation.

The rationale is simple: U.S. assets no longer provide adequate returns once adjusted for currency depreciation. A 10-year Treasury paying 4% yields little if inflation is above 3% and the dollar itself loses 10% of value. In real terms, investors are left with negative returns.

This dynamic threatens the stability of the U.S. financial system, which relies heavily on foreign capital inflows. With nearly $80 trillion in U.S. assets held globally, even modest outflows could destabilize bond markets, raise borrowing costs, and erode confidence further.

The Emerging Alternatives: Euro, Yuan, and Gold

Where does this capital go? Three destinations stand out:

1. Chinese and European Bonds – Despite concerns about transparency, Chinese bonds offer diversification. The euro, while constrained by internal divisions, remains the second-most used reserve currency.

2. Asian Equities – With growth shifting eastward, equity markets in Asia offer relative insulation from dollar volatility.

3. Gold – The ultimate hedge against currency debasement. From January to May 2025, as the dollar fell 9%, gold demand surged. With further rate cuts looming, the gold bull market has ample tailwinds.

Gold’s resurgence underscores a sobering reality: investors increasingly view the dollar not as the unquestioned foundation of global finance, but as a risk asset subject to volatility and political pressure.

The Dollar’s Shrinking Share in Trade

Data illustrates the slow erosion of dollar dominance:

• In 2020, over 80% of global trade (excluding Europe) was dollar-denominated.

• Today, local currency trade is surging, particularly among BRICS nations.

• Exporters from Mexico, Brazil, and Canada increasingly demand settlement in pesos, reals, or Canadian dollars rather than greenbacks.

Each transaction outside the dollar marginally reduces global demand for U.S. currency. Over time, this could lead to structural shifts in foreign exchange reserves, as central banks diversify holdings to match trade flows.

The Nightmare Scenario: A Feedback Loop of Decline

The greatest risk is not gradual erosion but a tipping point. If confidence in the dollar weakens significantly, the system could face a feedback loop of decline:

1. Exporters demand non-dollar settlements.

2. Dollar assets lose appeal, prompting capital outflows.

3. A flood of dollars returns to U.S. markets.

4. Excess supply drives inflation higher.

5. Further rate cuts accelerate depreciation.

In this scenario, the dollar begins to resemble an emerging market currency—volatile, unstable, and vulnerable to capital flight.

What This Means for Investors

For global investors, the implications are profound:

• Diversification is essential. Heavy exposure to U.S. dollar assets could prove costly if depreciation accelerates.

• Gold and real assets gain appeal. In an inflationary, weak-dollar environment, commodities and tangible stores of value become more attractive.

• Foreign equities offer opportunities. As capital reallocates, Asian and European markets may benefit disproportionately.

• Currency hedging costs matter. For exporters, hedging dollar risk can consume 2–5% of transaction value, eroding competitiveness.

Conclusion: The End of Dollar Exceptionalism?

The U.S. dollar is not about to lose its reserve status overnight. Its role in global finance remains unparalleled, and its liquidity still outshines all competitors. But its aura of invincibility has cracked.

Tariffs have fueled inflation, rate cuts threaten further devaluation, and foreign investors are quietly reducing exposure. Meanwhile, China and other emerging economies are accelerating local currency trade. For the first time in decades, a credible alternative system is taking shape.

The dollar’s decline may not be sudden, but it is real. The danger is that policymakers underestimate the risks, clinging to the illusion of perpetual dominance while the world adapts. Holders of dollars should take note: in an era of de-dollarization, complacency may prove costly.