Protectionism and the Debt Binge: U.S. Dollar Hegemony Under Threat — “Slowly but Surely, It Is Fading”

Collapse of Dollar Credibility Sparks Fracture in Reserve Currency System
Accelerating Shift Toward “Non-Dollar Assets”
Shrinking U.S. Share of Global GDP Fuels De-Dollarization

Signs of a shift in U.S. monetary policy are unsettling global markets. As the Federal Reserve (Fed) hints at ending quantitative tightening and potentially easing liquidity, the dollar faces intense downward pressure. This is more than a simple exchange rate fluctuation—it marks a potential turning point that could undermine the dollar’s status as the world’s reserve currency. The United States’ economic dominance is gradually waning; its share of global GDP is shrinking while fiscal deficits and national debt are swelling to record highs. Since President Donald Trump’s return to power, a surge in unpredictable protectionist measures and unilateral financial sanctions has further eroded global confidence. The trust that once upheld the dollar as an international safe haven is now fundamentally shaken.

Resurgence of the “Dollar Crisis” Narrative

On October 19 (local time), Forbes reported that “the U.S. dollar is facing a severe crisis,” adding that this could mark a “decisive turning point for Bitcoin.” According to the report, Bitcoin plunged below $108,000 from its all-time high of $126,000 following a “flash crash.” During the same period, gold prices surged 64% year-to-date, reaching a historic peak.

Investor Peter Schiff commented, “Gold has risen 64% and silver 87%. If anyone still believes this doesn’t signal an imminent dollar and financial crisis, they are delusional.” A staunch advocate of gold investment, Schiff interpreted the situation as “a harbinger of dollar collapse.” Citadel founder Ken Griffin echoed that view, noting, “Investors are reducing their reliance on the dollar and shifting into alternative assets. Gold and cryptocurrencies are emerging as the new safe havens.”

Kenneth Rogoff, professor of international economics at Harvard University, also warned, “The dominance of the U.S. dollar peaked in 2015 and has been declining ever since. This trend is now irreversible, and President Trump’s policies will only accelerate it.” Rogoff has repeatedly pointed to the growing dangers of America’s ballooning debt. The core issue, he said, is that “interest rates have normalized.” As the world’s largest debtor nation, the U.S. faces severe strain when long-term rates remain elevated. In fact, U.S. debt has tripled since the early 2000s. Rogoff cautioned that “the combination of massive debt and high interest rates is perilous.”

The Opposite of the 2008 Financial Crisis Dollar Rally

Today’s weak-dollar trend stands in sharp contrast to the 2008 financial crisis, when the dollar strengthened. Back then, one key factor behind the dollar’s appeal was the Saudi Arabian Monetary Authority’s preference for dollar-denominated assets. As in the 1970s—when Riyadh concluded that U.S. Treasuries were virtually the only large-scale investment instrument that could be purchased or sold without moving prices—investors between 2007 and 2009 viewed U.S. Treasuries as the most liquid asset in the world.

The privilege of a reserve currency becomes even more apparent in times of crisis. When turmoil intensifies, demand for dollars rises, boosting its value. During the 2008 financial meltdown and the 2020 COVID-19 recession, the United States could issue debt cheaply at low interest rates to finance fiscal deficits and sustain massive defense spending—maintaining global influence in the process.

But the current environment is markedly different. The emergence of diversified monetary systems, led by the Chinese yuan, is eroding the dollar’s monopoly. China, in particular, is aggressively promoting yuan internationalization to challenge dollar-centric global finance. As a result, the dollar’s supremacy is no longer absolute, and in future crises, its traditional “safe haven” function can no longer be taken for granted. Meanwhile, Washington’s belief that it can endlessly sustain its debt binge is dangerously complacent. One economist noted, “They believe they can expand debt forever. It’s the classic ‘this time is different’ mindset. Even if Democrats regain power, debt will keep rising.”

Amid these developments, the Federal Reserve has hinted at renewed quantitative easing within the year. On October 14, Fed Chair Jerome Powell said the central bank could end its balance sheet reduction—quantitative tightening (QT)—“within the coming months.” The Fed has exercised caution since the 2018–2019 QT episode, when rapid balance-sheet runoff triggered stock market volatility and depressed returns across asset classes. Announcing an end to QT now would decisively weaken the dollar’s value.

Credit Market Fears Boost Yen and Euro

As the dollar weakens, the yen and euro have rallied sharply. On October 17 in Tokyo, the yen rose 0.8% to break through 150 per dollar, its strongest level since the 6th of the month. Just a week earlier, the yen-dollar rate had hovered around 153 per dollar. Expectations that Liberal Democratic Party leader Sanae Takaichi would pursue fiscal expansion and monetary easing had driven the yen to eight-month lows, but the dollar’s recent slump has reversed that trend. During the same period, the euro climbed to $1.16, buoyed by dollar weakness and easing political tensions in France.

The yen’s and euro’s appreciation stems largely from concerns about the health of U.S. credit markets. Two regional banks—Zions Bancorp and Western Alliance Bancorp—disclosed fraud issues involving borrowers, spreading anxiety across the financial system. MUFG Bank analyst Michael Wan wrote in a recent report, “Concerns are mounting over the asset quality of the U.S. credit market, triggering sharp sell-offs in some regional banks and slightly weakening overall risk sentiment.”

These credit worries have reignited demand for safe havens, fueling yen and euro buying. Joey Chew, head of Asia FX research at HSBC, said in a report, “The unexpected resurgence of U.S.-China trade tensions is exerting downward pressure on the dollar.” Growing uncertainty surrounding President Trump’s tariff policy has prompted investors to unload dollars. Market analysts widely expect this trend to persist, arguing that until U.S. credit market fears subside, risk aversion will continue to support yen and euro strength.