US dollar shifting towards ‘risky’ currency status, analysts warn
The US dollar is going through “a possible regime shift” that could leave it as a “risky” currency going forward, UBS analysts have warned.
Even as volatility in financial markets has soared as a result of president Trump’s ever-changing tariff regime, the dollar has been sinking quickly, with the DXY index dropping four per cent since ‘Liberation Day’ to its lowest in three years.
“This kind of price action is highly unusual in view of the dollar’s typical role as a key reserve currency that appreciates when asset markets are volatile,” said UBS strategist Shahab Jalinoos.
Similar contradictory movements have been seen in the weakening of US Treasuries, with yields rising by 0.5 per cent over the last week even as competitors like German and Swiss government bonds stay flat.
Analysts across the financial world have been similar sentiments, with Deutsche Bank researchers labelling it a “dollar confidence crisis”.
“If the source of uncertainty and volatility, whether relating to global security or trade policy, is perceived to be the policy decisions of the US government itself, then it is possible that investors have made a conscious decision to scale down their allocations to US assets and to increase hedging of those assets,” said Jalinoos.
Investors now seem to be suggesting that they want a “much higher risk premium to hold US assets,” he added, or a weaker dollar first before adding to positions.
Major currencies such as the euro and more recently the pound have been a strong beneficiary of the dollar collapse, with sterling rallying for the seventh consecutive day to a six-month high against the dollar today.
“While the pound had previously lagged behind the euro as an alternative to the dollar, it now appears to be catching up,” noted Daniela Sabin Hathorn, senior market analyst at Capital.com.
Dollar reserve status at risk?
The sharp drop in the dollar has led many to warn that “de-dollarisation” might be on the table as the currency risks losing its status as reserve currency.
The dollar currently accounts for 58 per cent of global foreign exchange reserves, still in a dominant position but down from over 70 per cent just two decades ago.
In 2022, over half of the decline in dollar reserves came as the result of active selling by central banks, rather than market fluctuations.
“While there’s currently no single contender to dethrone the dollar, that’s missing the point,” said Nigel Green, CEO of Devere Group. “It’s not about one rival rising—it’s about confidence in the incumbent fading.”
“Reserve currency status isn’t a birthright. It’s earned—and re-earned—through stability, responsibility, and leadership,” he added. “Right now, the US is risking that reputation.”
Jonas Golterman, deputy chief markets economist at Capital Economics, said the aggressive ructions were “reminiscent of what happened to sterling during the Trussonomics debacle in Autumn 2022”.
He added: “It is becoming increasingly obvious that the Trump administration’s policy approach is in some ways undermining the trust in US institutions that underpins the dollar’s global role.”