News & Insight • Market Insights
29 October 2025 | Simon King
A View from The Bridge - I need a dollar
Our Thoughts on What Lies Ahead for the US Dollar
Aloe Blacc’s "I Need a Dollar" (2010), and its exploration of economic hardship and perseverance, resonates with our current thoughts on the US dollar. While we rarely dedicate an entire thought piece to a single topic, the dollar generates more client inquiries than any other subject. For decades, the US dollar has reigned as the world's reserve currency, the safe haven investors flee to in times of crisis and the standard by which global trade is measured. We have grown accustomed to its steady appreciation against every major currency, with the notable exception of the Swiss franc.
However, many commentators now question whether this supremacy will continue. This is a matter of utmost importance for us as investors and for our clients. We have long advocated international diversification in client portfolios, and it has been a successful strategy. It requires taking views on the path of exchange rates and we have been comfortable holding US assets priced in dollars. The continual strength of the dollar has been a significant contributor to returns for UK investors. It has been many years since we have had to seriously contemplate a sustained decline in the US dollar, so it is vital that we identify and understand the risks that lie ahead.
The Historical Context
In order to look forward we must have some historical context. After World War II, Allied nations designed the Bretton Woods agreement, which established the dollar as the world's reserve currency backed by gold. At that time, the US controlled two-thirds of the world's gold reserves and its economy represented approximately 50% of global GDP, so it was really the only option.
When President Nixon ended dollar-gold convertibility in 1971, many commentators predicted chaos. Instead, the dollar's dominance actually strengthened. Freed from gold constraints, the US developed even deeper financial markets. The petrodollar system, whereby oil-exporting nations recycled their dollar earnings into US assets, created new sources of demand. The dollar had transitioned from a gold-backed currency to one whose value rested purely on faith in American economic management, and this faith proved remarkably durable.
Since then, the dollar has weathered every storm it has encountered: the stagflation of the 1970s, the Latin American debt crisis of the 1980s, and the global financial crisis of 2008. As the world has become more volatile and unpredictable, investors have been driven toward the dollar, not away from it. This pattern has led economists to speak of the dollar's "exorbitant privilege", the ability to borrow cheaply, run persistent trade deficits, and face minimal external constraints on economic policy.
The current Trump presidency has unleashed an unprecedented period of change into the global economic system. A combination of aggressive trade policies, attacks on US and international institutions and systems and a determination to grow America out of its debt problems have resulted in the US dollar coming under sustained pressure for the first time in a very long time.
Where Are We Starting From?
To be clear, the US dollar remains the preeminent currency in the global system, and the changes we discuss will not threaten its position in the immediate future. It currently accounts for 60% of global foreign exchange reserves, far eclipsing any rival, including the euro: its nearest competitor at less than 20%. This means other countries are still comfortable holding their savings in US dollars.
The reasons for this are manifold: the US is the world's largest economy with the deepest and most liquid financial markets. It has the strongest and most technologically advanced military, it possesses robust institutions that protect property rights, and despite President Trumps’s best efforts, it offers a stable political system and independent judiciary.
Since World War II, when investors have sought safe haven, they have typically purchased US government debt, confident in America's creditworthiness. Global commodities, particularly oil, are predominantly priced in dollars. Central banks seeking to diversify their reserves hold dollars. Emerging market nations often borrow in dollars to attract both foreign and domestic investors. Most of the world's financial infrastructure is built around dollar transactions, making any shift in its dominance a major upheaval.
This has created a virtuous circle: because so many trust the dollar, more people use it, because more people use it, people trust it more. Because most international transactions occur in dollars, businesses and governments need dollar reserves, which increases demand for dollar-denominated assets. This dynamic has proven remarkably durable, even as America's share of global GDP has gradually declined. Its preeminent position has rarely been challenged, partly due to political and economic missteps that have prevented currencies like the yuan and euro from establishing themselves to the degree their share of world trade would warrant.
As we outlined earlier the dollar has weathered all storms but with a US administration so focussed on unashamedly unilateral and America First trade policies trends of change that have been established for some time are starting to accelerate.
Why Will This Change?
Over our lengthy investment careers, we have learned that complacency is dangerous. Several significant challenges are emerging that could eventually erode the dollar's privileged position.
1. China's Growing Influence
In many of our previous commentaries, we noted that China is in a vastly different position to counter the trade policies of the current US administration, compared to the first Trump presidency. Part of this thesis is that we continue to believe China is constructing an alternative trading bloc that can stand independently of US participation. This has been its plan for some time, but the process has accelerated, as the US government has adopted an increasingly hostile approach to trade with China.
While we have long questioned the accuracy of Chinese economic data, the country is undoubtedly still growing. More importantly, China is investing in long-term initiatives to enhance its economic and political influence globally. What began as the Belt and Road Initiative (essentially China securing access to commodities in far-flung regions) has evolved into broader investments aimed at creating demand for Chinese products and services.
As part of this strategy, China is both encouraging and requiring its trading partners to trade in yuan. To facilitate this, it has created new global financial systems that increasingly compete with existing dollar-dominated networks. Contrary to widely held belief, China is already the world's largest trading nation, yet its currency accounts for less than 5% of global reserves. While adoption of the yuan may be gradual, we believe it is inevitable and will eventually erode dollar dominance meaningfully.
However, the yuan faces substantial obstacles to reserve currency status. China maintains capital controls that limit the free flow of money. These controls are incompatible with reserve currency status, which requires deep, open financial markets. Chinese financial markets also lack the transparency, legal protections, and institutional independence that underpin confidence in the dollar. The key barrier is that becoming a reserve currency requires running persistent current account deficits, allowing other countries to accumulate your currency. China's mercantilist economic model contradicts this requirement.
Despite all these obstacles it would be dangerous to write-off the yuan as a potential major reserve currency. Whilst it is highly unlikely that it ever surpasses the US dollar it could sit alongside it.
2. Digital Currencies
Beyond his personal financial interests, one reason Donald Trump has become a major supporter of digital currencies is the genuine threat that central bank digital currencies (CBDCs) could significantly impact both the current financial system and the dollar. Many central banks, including China's, have developed these currencies, which could ultimately position central banks as the system's primary record-keepers. Trump is very clear that if CBDCs do succeed then the US version will be the dominant one.
This shift may occur because digital currencies could dramatically reduce transaction costs and settlement times for international trade, removing one of the dollar's key advantages. If countries can trade directly using interoperable digital currencies, the need for the dollar diminishes. The current administration hopes that by allowing an independent digital system to develop, it will maintain a lead over slower-moving central banks, while keeping this system dollar-denominated.
3. US Fiscal Concerns and Debt Levels
We could write an entire article on this subject; it represents perhaps the biggest threat to long-term dollar dominance and has been a concern since the author first entered markets decades ago. Since then, America's national debt has ballooned to over $35 trillion, reaching new peaks annually. Structural deficits are projected to persist indefinitely, and concerns about the dollar's purchasing power are mounting.
While the US government's ability to borrow in its own currency provides enormous flexibility, confidence in the dollar ultimately rests on faith in American economic stewardship. This situation has arisen because the US government and consumers have continued to consume goods and services they cannot afford, requiring vast borrowing. In most countries, governments borrow mainly from their own citizens. The US has been able to attract funds from overseas investors who happily hold dollar assets.
These investors have not only lent the US government money to finance consumption but also provided additional funds to pay interest on its mountain of debt. Because the dollar is so attractive for the reasons outlined earlier, overseas investors have effectively accepted below-market interest rates. This creates an interesting paradox: the more the US relies on its reserve currency privilege to fund deficits, the more other nations question the dollar's long-term stability. Eventually, persistent fiscal imbalances could trigger a loss of confidence in the dollar. History shows that reserve currency status is not permanent: witness the run on the British pound in 1992. The fear is that eventually the rest of the world will demand higher interest rates to continue lending.
4. Geopolitical Tensions
Recent geopolitical tensions have accelerated what economists call "dedollarisation." The freezing of Russian foreign exchange reserves following the 2022 invasion of Ukraine sent shockwaves through central banks worldwide. Many nations, particularly those with complex relationships with Washington, recognize that dollar reserves could be weaponized. This realization has accelerated efforts to diversify away from dollar holdings, though the pace remains gradual given the lack of viable alternatives.
Saudi Arabia has begun accepting Chinese currency for oil sales, a symbolic crack in the petrodollar system that has underpinned dollar dominance since the 1970s. India, Brazil, and other major economies are increasingly conducting bilateral trade in local currencies. While each individual agreement seems small, collectively they represent a trend: countries are hedging against dollar dependency. For these nations, over-reliance on the dollar has become a strategic vulnerability. Additionally, emerging market countries are now stronger and sometimes have the option to borrow in their own currencies.
Where Are We Now?
The dollar began declining in early 2025, when nervousness over the tariff policies of the new administration, particularly the strain on the US government debt market, led to a 10% fall against a basket of world currencies. Surprisingly, the dollar has been largely stable since late June.
Fiscal concerns have not dissipated, and US interest rates are slightly lower, which theoretically should pressure the dollar further. Yet the US economy and corporate performance remain the strongest among major markets, which in our experience should support dollar recovery. The current stability probably reflects two competing schools of thought on whether the US economy will prosper or deteriorate, holding each other in check.
Another explanation could be President Trump's stated preference for a more competitive (lower) dollar to make US goods and services more attractive to overseas buyers. We see little evidence of policies or actions that would achieve this outcome, but perhaps rhetoric alone is sufficient.
Where Are We Going?
Many experts believe the dollar's future lies not in sudden collapse but in gradual erosion toward a multipolar reserve system. A multipolar system would reduce both the privileges and burdens of dollar dominance. The US would lose some ability to finance deficits cheaply and project power through financial sanctions but would also face less upward pressure on the dollar, which hampers exports. Other nations would gain monetary autonomy but lose the convenience of a single, universally accepted medium of exchange.
The euro, despite the eurozone's challenges, currently remains the second most important reserve currency, with the yen and pound sterling remaining regionally significant. As emerging markets grow and their financial systems mature, more currencies may join this elite group.
Although these forces will continue regardless of US policy choices, the dollar's future will likely be determined as much by America's decisions, as by external pressures. Maintaining dollar status requires sustained investment in the factors that made it dominant: deep, liquid financial markets; credible institutions; rule of law; and prudent macroeconomic management. The rise of digital assets and blockchain technology may mean the dollar shares its pre-eminence with a reserve currency fundamentally different from anything we have seen before.
The US cannot sit idly by and assume dollar dominance is a guaranteed right. At some point, it must properly address national debt levels through a credible long-term plan for controlling deficits and stabilizing the debt-to-GDP ratio. This requires tax reform, productivity enhancement, and fairer wealth distribution.
The administration must also maintain the integrity of US institutions. The Federal Reserve's independence must be protected from political interference, and the judicial system must remain impartial. There must be balance between market efficiency and investor protection in regulatory oversight. Without these measures, global confidence in the dollar will erode. Financial sanctions should only be used judiciously; overuse will accelerate development of alternatives and erode the dollar's neutral status. Much of this runs counter to current US policy, undoubtedly exerting further pressure on the currency.
If the dollar continues declining, we would make the following observations regarding its implications: Americans would likely face higher borrowing costs as the US pays more to finance deficits. The government would need to reduce spending or increase taxes to cover rising interest bills. While a weaker currency normally makes exports more attractive, current policy aggression may mute this benefit.
Depending on the pace of decline, global effects could be pronounced in the short term. Financial instability would increase with heightened contagion risk if any country or sector encounters difficulties. Emerging markets with elevated dollar-denominated debt would be particularly vulnerable. International trade would also suffer, as partners lose confidence in the dominant settlement currency, compounding adjustments to tariff impacts.
Conclusion: What Does This Mean for Investors?
The dollar will undoubtedly remain the world's primary reserve currency for the foreseeable future. However, "primary" does not mean "unrivalled," and the margin of dominance matters enormously. The dollar need not collapse but merely weaken to cause significant impact to global capital flows and the performance of major asset classes and individual securities.
Investors should expect increased currency volatility, higher US borrowing costs, and a more bifurcated financial system. The dollar may not collapse, but its exceptional privilege could diminish, and with it, some of the economic advantages Americans have long enjoyed.
We have long advocated balanced, diversified portfolios, but we must now consider further diversification. The US economy will remain the preeminent market for some time, so we will continue investing in it. However, the winners and losers in a world with multiple strong reserve currencies will look vastly different from today's landscape.
The US dollar stands atop the global financial system today, reinforced by genuine economic and institutional strength but investor complacency is dangerous. Real structural threats to the status quo are accelerating. The dollar's future is not binary; it is not dominance or collapse. Instead, we are entering an era of gradual transition toward a more fragmented monetary system.
For us as investors, understanding this nuanced reality is not pessimistic, it is prudent. Those who recognize the shifting landscape and position themselves accordingly will be best prepared for whatever the next chapter holds. The dollar's edifice may have cracks forming in its foundation, but it remains strong. The question is not whether to abandon ship, it is whether to acknowledge that even the mightiest vessels need lifeboats.