Do Recent Claims of Debasement Reflect an Erosion of Dollar Dominance?

The narrative of dollar debasement is gaining traction. Since January 2025, the US dollar has fallen by 9 per cent, reaching its lowest level in four years. Peter Schiff, an American financial commentator, warns that “King Dollar’s reign is coming to an end […] prepare for a historic economic collapse.” Even mild-mannered investors, including Citadel Securities founder Ken Griffin, argue that central banks now “view gold as a safe-harbour asset in a way the dollar used to be viewed.” Yet, for all these dollar doubts, global investors poured a record $1.55 trillion USD into long-term US assets in 2025, sending mixed signals about the future of the world’s dominant currency.  

The foundations of today’s international monetary system trace back to World War II, from which the United States emerged as the uncontested global superpower. The 1944 Bretton Woods Conference established a global gold-backed dollar system, cementing US financial hegemony in the West. Member countries pegged their currencies to the US dollar, enabling them to achieve exchange rate stability. Simultaneously, America’s Marshall Plan provided war-torn European nations over $13 billion USD ($137 billion USD today) in aid. These funds were primarily used to purchase goods from the United States, solidifying the dollar as the default medium of exchange. 

Yet, in the 1960s, the US saw high inflation rates as Washington accumulated large deficits on social programs and the Vietnam War. Countries began viewing the dollar as overvalued relative to its fixed $35 USD exchange rate and began converting the dollar into gold in large quantities. By 1971, given America’s limited gold reserves, President Nixon was forced to suspend the convertibility of dollars into gold and float the exchange rate, thereby allowing supply and demand forces in the foreign exchange market to determine the dollar’s value. Though the “Nixon Shock” effectively ended the Bretton Woods system, the dollar continued to dominate international trade and central bank currency reserves. As a result, the United States enjoyed cheap and ample borrowing, inexpensive imports, stability, and sanction power—though at the cost of a massive trade deficit.

However, the privileges of dollar dominance enabled a steady buildup of public debt that has often been linked to currency weakness. In FY 2025, the US ran a $1.8 trillion USD deficit, amounting to a debt-to-GDP ratio of 122 per cent. An expanding national debt worries investors, as massive debt servicing costs can crowd out economic investment. Moreover, the lack of political action to address the debt crisis erodes confidence in US creditworthiness, resulting in credit downgrades by Moody’s and Fitch. Speculation about the US’ declining creditworthiness can be seen in the data: In the same period that US debt rose from 38 per cent of GDP in 1999 to over 100 per cent in 2024, the dollar’s proportion of global reserves fell from 70 per cent to 58 per cent. 

In tandem with rising debt, the second Trump administration has spooked markets by encroaching on the independence of the US Federal Reserve. The Department of Justice’s (DOJ) criminal investigation into Federal Reserve Chair Jerome Powell was seen by many analysts as an attempt by the White House to pressure for quicker rate cuts. Kevin Warsh, Trump’s pick for the next Federal Reserve Chair, is expected to favour lower interest rates in line with the President’s views. An independent central bank is critical for keeping inflation around the 2 per cent target, which, in turn, helps keep the value of the dollar stable. Although COVID-era US inflation peaked at 9 per cent, Morgan Stanley notes that, four years later, inflation remains elevated at a rate of 3 per cent. 

These domestic concerns—rising debt, persistent inflation, and questions about the Federal Reserve’s independence—have unsettled investors. But recent fears of structural debasement extend beyond domestic indicators, encompassing America’s unpredictable tariff policies and expanding use of sanctions as well. President Trump has long viewed trade deficits negatively, saying as early as 2019 that “the US is losing $500 billion a year” to China, which “cannot continue.” In line with his past statements, Trump’s April 2 ‘Liberation Day’ in 2025 imposed a universal tariff of 10 per cent on all imports, the largest single US import tariff hike since the 1930s. Normally, tariffs can strengthen the dollar by reducing demand for foreign currencies. However, Trump’s erratic implementation of tariffs and widespread retaliatory tariff threats by international actors have instead led to the significant depreciation of the dollar. Throughout the rest of 2025, as threats of a global trade war loomed, the dollar performed poorly. It fell even further in January of this year when Trump said “the dollar’s doing great,” indicating a lack of concern for, or denial of, the dollar’s decline.  

Some commentators argue that the real trigger of the dollar’s slide was the de-dollarization movement, which accelerated in response to US sanctions on Russia. Following Russia’s 2022 invasion of Ukraine, the US sanctioned Russia by freezing $5 billion USD of its central bank assets, prohibiting trade of Russian securities, and barring Russian banks from using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) banking system. In response, world leaders, particularly those of non-Western BRICS nations, have sought alternative payment systems, such as BRICS Pay, to reduce reliance on America. BRICS nations, responsible for 35 per cent of global GDP, declared “serious concerns about the rise of unilateral tariff and non-tariff measures” at their 2025 summit. Yet, these efforts remain fragmented, and none offer the depth, liquidity, or trust embedded in dollar-based systems. 

Proponents of debasement feel vindicated by gold’s recent surge. Gold and the dollar are historically inversely related, with investors and central banks using gold as a hedge against inflation and the instability of holding USD. In January 2026, gold hit a record $5,000 USD as central banks aggressively diversified from dollars to gold and investors sought ‘safe haven’ commodities. The dollar is also functionally tied to the world’s most traded commodity: oil. The petrodollar system, founded in the 1970s, involves oil-exporting OPEC nations pricing their crude oil exclusively in USD. The constant global demand for oil requires countries to maintain large USD reserves. Moreover, oil exporters like Saudi Arabia can face large surpluses in USD, which they ‘recycle’ into US Treasuries and other assets, lowering borrowing costs for the US government. Over the last decade, however, the increased use of sanctions and wars in the Middle East has incentivized nations such as China, Russia, and India to adopt alternative currencies (such as the petroyuan), threatening this pillar of dollar dominance. Unpredictable oil prices in 2026, fuelled by the Iran war and regime change in Venezuela, threaten to erode petrodollar usage further and raise US inflation.

Even so, these concerns do not necessarily translate into an imminent unravelling of dollar dominance. A rebalancing does not mean decline. In a 1987 paper, economist Barry Eichengreen argued that it would be possible for the US to decline as global hegemon while its international monetary system persisted. Policy cooperation and institutional infrastructure like the IMF make dollar systems ‘sticky,’ not the size of America’s military or economy. Despite its flaws, the dollar’s incumbency is powerful, and no currency comes close to its institutional credibility and scale. 

According to Eichengreen, the future of the dollar rests in the hands of US leadership. Effective policies on debt, trade, and international cooperation will help quell doubts about the currency’s status as a safe haven. While BRICS nations continue to promote alternatives like the New Development Bank, petroyuan, and BRICS Pay, these efforts remain fragmented compared to the institutionalized architecture of the US-led IMF. It is worth noting that this recent dollar devaluation follows a decade of dollar strength, which itself followed periods of weakness after the 2001 Dotcom crash and the 2008 financial crisis. Episodes of dollar weakness often reflect cyclical pressures rather than structural collapse. In this sense, while markets may be hedged against the dollar in the short term, they are unlikely to abandon it anytime soon. 

Edited by Ellen Lurie

Featured Image: Approximately $1.9 trillion of the $2.43 trillion US currency in circulation is composed of $100 bills. One Hundred Dollar Bill. Photo by Teddy James is licensed under CC BY-NC-SA 2.0.