The US dollar has experienced a spectacular decline in recent months. Investors call it a correction, analysts see a turning point, and pessimists even predict the end of dollar hegemony. But let’s pause for a moment. While the dollar is indeed falling rapidly, it is far from collapsing.
This dramatic decline must be put into perspective. Historically, the US dollar remains strong. Between 2011 and its peak in 2022, the dollar rose by more than 50 percent, reaching levels rarely seen since the 1980s.
After its recent fall, the dollar has returned to the level of five years ago and remains 35 percent above its 2011 low. Moreover, the dollar ended last year very strong, buoyed by the euphoria over Trump’s election victory and a booming US stock market. This year’s weakness is primarily a reaction to last year’s dollar strength. It is not so much a sharp decline in absolute terms, but rather a swift correction following a prolonged period of extraordinary performance.
Arguments against the dollar
There are numerous and worrying reasons behind the dollar’s recent decline. President Trump’s aggressive protectionist trade policies have fueled fears of a global economic slowdown. The announcement of import tariffs on goods from China, Europe, and other trading partners has, for the first time, made the dollar a source of risk instead of a safe haven.
Even more concerning is the crisis of confidence in the Federal Reserve. Public pressure from Trump on Fed Chair Jerome Powell undermines the independence of the central bank. For a reserve currency, there is nothing more damaging than doubts about the independence of monetary policy. In addition, the United States is grappling with record deficits: the budget deficit stands at 6.8 percent of GDP, and the current account deficit exceeds 4 percent. The country is increasingly dependent on foreign financing. Globally, momentum is also shifting—Europe is recovering, China is stabilizing, and emerging markets are once again attracting capital.
Arguments for the dollar
But against these concerns stand strong arguments that support the dollar’s dominance. The most important is that there simply is no real alternative.
The euro is often mentioned as a potential successor, but it suffers from fundamental weaknesses. The eurozone is essentially made up of 27 different jurisdictions that do not cooperate effectively. Every crisis exposes this design flaw—from the Greek debt crisis to the recent energy crisis. The Chinese renminbi is hindered by capital controls and a lack of transparency. Beijing wants the benefits of a reserve currency but not the openness and free capital flows that come with it. As long as China does not fully open its financial markets, the yuan cannot become a true competitor.
Then there are alternative assets like gold and bitcoin. But these are ultimately “greater fool” investments—worth whatever someone is willing to pay, with no intrinsic economic value or the stability required of a reserve currency. A key difference is the American monopoly on force that guarantees the value of the dollar. Gold and bitcoin lack that.
Network effects
What really strengthens the dollar are network effects. More than 80 percent of all currency transactions still occur in dollars, and nearly 60 percent of all global reserves are held in dollars. This dominance is self-reinforcing: because everyone uses dollars, everyone needs dollars. It’s like Microsoft’s operating system—not the best, but because everyone uses it, it remains popular. Moreover, the United States has the most advanced, liquid, and reliable financial system in the world. US Treasuries still offer the best combination of safety, liquidity, and return at scale.
Diversification and market psychology
Still, the trend toward diversification is real. We’re seeing bilateral agreements in local currencies, BRICS currency projects, and the rise of central bank digital currencies. China and Russia are increasingly trading in their own currencies, and Saudi Arabia is considering selling oil in yuan. These developments point to gradual fragmentation of the monetary system, but they remain marginal compared to dollar hegemony.
Interestingly, the market currently appears heavily positioned for a further decline in the dollar. This is usually exactly when the market is tested by a stronger dollar. When everyone leans in one direction, the market tends to go the other way.
Conclusion
The dollar remains king because all pretenders to the throne have serious flaws. Its hegemony is based more on the absence of alternatives than on its own strength. This situation could persist for decades. History teaches us that no currency enjoys eternal dominance—the British pound ruled until World War I, after which the dollar took over.
Perhaps the dollar is now on the verge of a similar transition, but it would be a gradual one that could take decades. In the world of currencies, trust is everything, and that can vanish in an instant. But until a real alternative emerges with the scale, liquidity, and reliability of the dollar system, the dollar remains the least bad option.
Han Dieperink is Chief Investment Officer at Auréus Vermogensbeheer. He previously served as CIO at Rabobank and Schretlen & Co.