Three developments stand out. First, Washington’s commitment to the liberal economic order under the leadership of Donald Trump is being widely questioned. Rather than acting as the guarantor of open markets, Trump has reframed global trade as a transactional system where countries must “buy down” US tariffs. This means other countries must essentially now buy American Treasuries and other securities in exchange for access to the US market.

Second, surging US debt is increasing doubts about US fiscal stability. The Trump administration’s major tax cuts and spending plans are projected to create persistent deficits of around 6% of GDP, and US government debt has ballooned to record levels. This has prompted foreign central banks to reduce their dollar holdings.

Third, the Trump administration is openly attacking and undermining US government agencies and the country’s central bank, the Federal Reserve. Trump has repeatedly threatened to replace the current Fed chair, Jerome Powell, and dismiss other central bank officials since returning to the White House in January.

Central bank independence is considered a hallmark of credible monetary governance and undermining it raises doubts about whether the US remains a reliable anchor for the global financial system. According to Reuters, European officials are now openly questioning whether the Fed will continue to supply dollars to overseas central banks at times of financial strife.

Taken together, these actions are striking at the core foundation of dollar dominance: the assumption that the US will behave predictably, responsibly and with institutional restraint.

Despite the turbulence, no single currency is ready to replace the dollar. China’s renminbi still lacks open capital markets and strong legal protections, while the euro lacks a unified fiscal authority. New digital currency platforms remain experimental or speculative.

Still, the world is moving towards a more fragmented monetary landscape. Countries are diversifying their reserves into gold and other non-dollar assets. At the same time, regional payment systems are proliferating and dollar-denominated lending to emerging economies is declining.

Commodities are also priced increasingly in currencies other than the dollar. And no longer are only countries like China retreating from the dollar system, even US allies in Europe are encouraging banks to reduce their reliance on dollar funding.

The global economy is entering a financial interregnum – a period in which the old order is fading but the new one is not yet born. The dollar’s dominance will not vanish overnight as too many institutions and networks still rely on it. But its uncontested supremacy is coming to an end.

A fragmented financial system will reduce US leverage, while also making the global economy more complex and, possibly, more crisis-prone. The dollar is not dead. But the world is slowly preparing for life beyond dollar hegemony, and the second Trump administration may be the catalyst that turns long-running dissatisfaction into systemic change.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Fabian Pape receives funding from the Leverhulme Trust (ECF-2024-367).

Johannes Petry receives funding from German Research Foundation (446618653)

Tobias Pforr received funding from the European Research Council (grant agreement No 884910).