How dollar crisis would unravel world economy A global reckoning

The U.S. dollar has long been a pillar of global financial stability, a symbol of safety and reliability for investors and governments alike. However, as tensions rise in U.S. economic policy and market confidence wanes, this cornerstone is showing cracks. In a recent article, The Economist outlines a grim scenario in which a sustained crisis of confidence in U.S. assets could lead to a profound shake-up of the global economy, igniting a domino effect that would extend far beyond America's borders.

The dollar, which has experienced a marked decline of over 9% since its peak in mid-January, is now facing scepticism in the wake of significant policy missteps under President Donald Trump's administration. While the yield on U.S. Treasury bonds has increased, suggesting higher returns for investors, the simultaneous decline in the dollar signals growing doubts about America's fiscal and economic health. With many foreign asset managers rumoured to be selling off U.S. assets, the question arises: What happens if the market loses faith in the greenback entirely?

The article points to the reckless trade war initiated by Trump, which has ruptured supply chains, heightened inflation, and fueled a recessionary risk, as a critical factor undermining trust in U.S. assets. Moreover, the U.S. government’s mounting fiscal irresponsibility—with an already high budget deficit and plans for even more borrowing—adds fuel to the fire. As Trump pushes for tax cuts and increased borrowing, the global financial community begins to question America's ability to sustain its debt load and maintain the stability of the dollar.

What is particularly unsettling is the growing concern about U.S. governance itself. The article highlights how the White House’s erratic policies, ranging from inconsistent tariffs to the undermining of the Federal Reserve’s independence, have prompted doubts about America's political stability. The Federal Reserve, already under pressure to lower interest rates, finds itself caught between supporting a shaky economy and avoiding the dangerous precedent of financing an uncreditworthy government.

The risks of a full-blown bond market crisis are becoming increasingly real. With foreign governments and investors holding over $8.5 trillion in U.S. Treasury debt, any weakening of demand could trigger a cascade of problems, from rising interest rates to a loss of investor confidence. The U.S. must refinance $9 trillion in debt over the coming year, and if Treasuries are no longer seen as a safe haven, the consequences would be catastrophic for the budget and the broader financial system.

While there are immediate benefits for some sectors of the U.S. economy in a weaker dollar, The Economist argues that the long-term consequences of eroding trust in the greenback would be far-reaching. Global trade, which relies heavily on the dollar, would suffer as investors scramble for alternatives. The euro, yen, and cryptocurrencies are seen as pale substitutes for the dollar, failing to offer the same level of security and stability. The loss of the dollar's dominance would not only disrupt financial markets but could also destabilise economies around the world, leading to boom-and-bust cycles as investors search for safe assets.

The article concludes with a stark reminder: the world’s financial architecture is built on the U.S. dollar. Should its role as the global reserve currency be called into question, the resulting upheaval would be unprecedented. The global economy, for all its faults, has flourished on the steady foundation provided by the dollar. If that foundation begins to crack, it could send shockwaves across the world, altering the course of global finance for generations to come.

By Vugar Khalilov