The Safe-Haven Status of the US Dollar Is Eroding! Economists Warn: Trump Is Triggering a Major Crisis

After Trump launched a full-scale trade war, something most people did not expect happened: the safe-haven status of the US dollar was shaken. Economists warned that the significant drop in the US dollar index was due to Trump triggering a major crisis, and confidence in the US was declining.

For decades, US administrations from both parties have cultivated the dominant role of the US dollar in cross-border trade and its status as a safe haven, as it helps lower US borrowing costs and enables the US government to project power overseas, which is part of dollar hegemony. But if confidence in the US is damaged, these significant advantages could disappear.

Barry Eichengreen, an economist at the University of California, Berkeley, said, "Global trust and reliance on the US dollar were built over half a century or more, but it could vanish in the blink of an eye."

Since mid-January, the US dollar has fallen 9% against a basket of currencies, hitting a three-year low, a rare sharp decline, especially against the backdrop of global instability.

Many investors, alarmed by Trump, do not believe the US dollar will quickly lose its status as the global reserve currency but are more inclined to think it will gradually weaken. However, even this slow decline is concerning enough, as it means the US will lose many advantages.

Since most global commodity transactions are conducted in US dollars, even though the US has doubled its federal debt over the past decade and done many things that would typically deter investors, demand for the US dollar remains strong.

This allows the US government, consumers, and businesses to borrow at exceptionally low interest rates, accelerating economic growth and improving living standards. The US government also frequently uses the dominance of the US dollar to influence other countries' economies to achieve its own goals.

The international community is losing confidence in the US dollar.

However, the status of the US dollar is being shaken. Deutsche Bank warned earlier this month, "The safe-haven attributes of the US dollar are being eroded." Capital Economics pointed out, "The reserve currency status and broader dominance of the US dollar are at least somewhat problematic, and this is no longer an exaggeration."

Traditionally, as tariff hikes reduce demand for foreign products, the US dollar generally strengthens. But this time, the US dollar not only failed to strengthen but also fell, puzzling economists and hurting consumers.

Any American traveling abroad knows that a strong US dollar can buy more. But now, the prices of French wine, Japanese and South Korean electronics, and many other imported products may rise, not only because of tariffs but also due to currency depreciation.

If the US dollar loses its safe-haven status, it could hit US consumers in another way: mortgage and car loan rates would also rise, as lenders would demand higher interest to compensate for increased risks.

More worryingly, the ever-expanding US federal debt could face higher interest rates. US federal debt has already reached 120% of GDP.

Benn Steil, an economist at the Council on Foreign Relations, said, "Most countries with such a high debt-to-GDP ratio would trigger a major crisis, and the only reason we have escaped is that the world needs the US dollar for trade."

Additionally, Trump has repeatedly threatened to undermine the independence of the US Fed, raising concerns that he will force the US Fed to cut interest rates to boost the economy, even if it risks triggering runaway inflation, which would certainly drive people away from the US dollar.

Economists noted that Trump's "Liberation Day" evokes the 1956 Suez Crisis, which exposed the political incompetence of the UK, led to a loss of trust in the country, and ultimately brought down the British pound. If Trump is not careful, his so-called Liberation Day could be seen as a similar turning point.