The simultaneous sharp declines in US shares, bonds and the dollar after President Trump’s “Liberation Day” raise an important question.
Is the US dollar’s role as the world’s reserve currency under threat?
We look at why, for now, there’s no real alternatives and the dollar’s likely to remain top dog despite the volatility.
This article isn’t personal advice. Remember, investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
The dollar’s decline
The recent plunge in the value of the US dollar in 2025 puts it on track for its worst performance in 30 years.
The parallel decline in US shares, bonds and currency is something we associate with emerging market crises – when investors lose confidence in a country and have a fire sale, selling everything.
It wasn’t always like this.
In a typical crisis, the credit window - companies’ ability to borrow - goes from wide open to slammed shut in an instant. This leaves borrowers scrambling for funds – and much of that funding around the world’s in dollars. This helps push up the value of the US dollar against other currencies.
The dollar also typically gains when the US economy is booming and demand for borrowing is strong. Other currencies advance against the dollar in a goldilocks economy – not too hot, not too cold. This creates a “dollar smile” rising when the economy is either weak or strong, but falling in between.
Today, that smile has turned to a frown.
Before the dollar
Changes in the world’s dominant currency are rare.
The Spanish “pieces of eight” underpinned the global financial system in the sixteenth century, followed by the Dutch guilder a century later. Pound sterling reigned supreme from the end of the Napoleonic War until the baton passed to the dollar between the world wars.
The US economy overtook the UK economy years before the dollar outstripped the pound in financing global trade.
The dollar dominates
If you drink a Georgian wine in a restaurant in Argentina, a Canadian wine in New Zealand, or a South African wine in Lebanon, there’s a very good chance that it was bought and sold in dollars as it crossed between multiple continents.
When one currency dominates global transactions, the costs of trading that currency falls. So, while the US share of global GDP has shrunk from around half in the 1950s to around a quarter today, the US dollar is on one side of around 90% of all foreign exchange transactions.
What are the alternatives?
Currently, no other currency offers the same liquidity in high quality government bonds to match the US.
Europe remains an unfinished union, reluctant to issue joint EU bonds in the scale needed. China maintains tight capital controls so the renminbi is a tiny proportion of the reserves of the world’s central banks and is less attractive for investors.
Gold’s a viable store of value, but it’s too bulky to be practical for payments in cross-border trade.
None of this means that the dollar’s role cannot shrink. The dollar’s share of global foreign exchange reserves has fallen from around 70% to under 60% over the last 25 years.
This decline has been offset by a growing use of currencies from small, well-managed economies like Switzerland, Australia, Canada, New Zealand, Singapore, South Korea, Denmark or Norway. Central bank reserve managers are diversifying geographically - in the same way that investors should too.
Emerging markets are building direct ties that cut out the currencies of the developed world. Brazil plans to issue “Panda Bonds” – debt issued in Chinese renminbi – later this year.
Stability under threat?
The role of the US dollar seems secure, but the new administration is pursuing policies that could undermine its stability.
Trump’s chief economist, Stephen Miran, has proposed a Mar-a-Lago accord that threatens to forcibly convert foreign holdings of US government bonds into hundred-year bonds paying low interest rates. This will probably have a dramatic negative effect on markets so should be unlikely to happen. But, after the events of the last few months, it’s no simple task predicting the direction of US policy.
We expect the US dollar to maintain its dominant role among global currencies. But we are likely to see a gradual shift towards a more multi-polar world over the next decade. And investors cannot ignore the risk that policy shocks accelerate this trend.
The US makes up over half of the global stock market. It’s the world’s biggest economy and home to some of the globe’s largest companies.
The HL US Fund provides a way to invest in this powerhouse where the hard work is done for you. HL’s experts have handpicked an external team of fund managers, who pick US stocks they believe offer the best potential for long-term performance.
The HL US Fund is managed by Hargreaves Lansdown Fund Managers Ltd, part of the HL Group.