Understanding the vibe shift on the dollar
Gold prices surged last week, hitting record highs, as investors flocked to bullion. For centuries, gold has acted as a safe-haven asset in periods of political and economic uncertainty, and central banks, especially in emerging markets, have been steadily increasing their gold reserves since the 2008 global financial crisis. Private investors, however, appear to be driving much of the demand over the past year, particularly through buying gold-backed exchange-traded funds in response to US President Donald Trump’s sweeping tariffs, his threats to Federal Reserve independence, and geopolitical tensions.
Though gold prices gave back some of their recent gains just days later after hitting a record-breaking price of five thousand dollars per ounce, the broader year-long increase in gold prices is the bigger story and suggests to some a looming US dollar crisis. That narrative gained traction when Trump publicly signaled indifference about the dollar’s most recent decline last month. Brushing off concerns about a weaker dollar, he highlighted its benefits for business—a stance that, on its own, may have further contributed to the greenback’s slide to its lowest level since 2022.
The president’s decision to shrug off dollar depreciation fits within a broader pattern, suggesting that the White House is comfortable—perhaps even pleased—with a weaker dollar because they view it as a tool to address global trade imbalances. However, this strategy carries risks: it could help rebalance the US trade deficit but would also likely erode returns for foreign investors and complicate Treasury Secretary Scott Bessent’s efforts to persuade the world to continue financing US debt.
Is the US still committed to a strong dollar?
Last January, when Trump first named Stephen Miran as chair of the Council of Economic Advisers, Miran’s now famous 2024 report “A User’s Guide to Restructuring the Global Trading System” re-emerged in public discourse in Washington and beyond. While various elements of the paper attracted attention, it was Miran’s call for a new multilateral currency accord to intentionally devalue the dollar that truly raised eyebrows worldwide. He has since pulled back from publicly supporting this idea. Bessent also maintains that the United States is committed to a “strong dollar” policy, and currency valuations have not been incorporated into any trade agreement terms yet.
Despite such public pronouncements, it is a safe bet that the Trump administration views a weaker dollar as a positive development for its economic agenda. From Trump’s point of view, the main draw of a weaker dollar is that it should boost US exports while raising the cost of foreign goods at home—a development the White House would welcome. The president has long expressed his view that exchange rate levels have favored foreign countries, particularly China. Indeed, the competitive boost derived from a weak exchange rate is a major reason why China has maintained an undervalued currency. From the White House’s perspective, a rebalancing of currency values is overdue.
This dollar “vibe shift” is different
Given that the White House is unlikely to view a weakening dollar as a concerning development, it is not unreasonable to conclude that all the consternation about a depreciating greenback is overstated. Indeed, when placed in historical context, the decline in the dollar over the last year is less dramatic than it might seem. Many observers have correctly pointed out that the dollar today still trades within its normal range, and there is no reason for great alarm. The dollar’s position as the world’s preeminent currency, they argue, remains secure and is unlikely to change because of a short-term decline in value. This is a fair point to make. The dollar’s value appreciates and depreciates over time, and these short-term movements do not necessarily translate into meaningful changes in the currency’s global role.
Moreover, skeptics can also point to warnings dating back at least one decade about de-dollarization—the gradual decline of the dollar’s dominance across a range of functions that international currencies serve in the global economy. Pessimism about the future of the dollar over the last ten years has largely hinged on concerns about the United States’ (over)use of financial sanctions. “Weaponizing” the dollar, the argument goes, raises fears in some countries about the risks of dollar dependence, prompting them to look for currency alternatives. Yet even as some countries adjusted down their exposure to the dollar, the macro picture changed very little, once again suggesting that the currency is bulletproof.
Still, there is reason to think that the current dollar “vibe shift” is different and more consequential. Because sanctions risk affects only a small subset of states impacted by US economic penalties, the damage to the dollar’s appeal is contained to that small group, stunting the macro effects of select, country-level de-dollarization. That contrasts with our present moment, where the political forces that seem to be weakening the dollar’s appeal apply far more broadly. The perception that US foreign economic and security policy is wildly unpredictable has solidified across the world over the last year, including among traditional allies. The world has also watched efforts within the United States to weaken the Federal Reserve’s political independence through unprecedented legal attacks. Events like these are reshaping widely held perceptions of the United States—and by extension, the US dollar—among official and private investors abroad. This, in turn, could lead to slow but steady reductions in foreign capital flowing into the United States—essentially an extended “sell America” trade—and contribute to a sustained swoon in the currency’s value.
In addition, an experiment with a weaker dollar could also contribute to financial instability. As noted, the current trend of a weaker dollar through the selling of dollar assets affects a broader swath of buyers, especially private investors. If the slide continues, the administration’s mettle and commitment to dollar depreciation may eventually be tested against rising risks in financial markets.
The stakes of dollar stability for foreign investors
A depreciation of the US dollar does not affect all investor classes equally. For domestic investors, fluctuations in its external value are generally less consequential than for foreign investors. For domestic investors holding Treasury securities and other dollar-denominated assets, returns are primarily determined by nominal yields and asset-price changes, rather than exchange-rate movements.
For international investors, by contrast, currency stability plays a much larger role in total return calculations. A stable dollar reduces exchange-rate risk and preserves the foreign-currency value of dollar-denominated holdings. When the dollar broadly depreciates, the value of these assets declines in foreign-currency terms—most notably relative to major currencies such as the euro—even if nominal returns remain unchanged.
Persistent or policy-induced dollar weakness may alter international portfolio allocation decisions. In particular, foreign investors may reallocate toward non-dollar assets to mitigate expected currency losses, with the effect most pronounced in short- to medium-maturity assets, where offsetting exchange-rate risk is harder.
Bessent has generally exercised caution by avoiding explicit discussion of the dollar and, when pressed, reiterating the long-standing “strong dollar” policy. From a political-economy perspective, maintaining Treasury yields at stable or lower levels aligns with the Treasury secretary’s institutional incentives.
Sustaining a broad and diversified investor base is critical for the US Treasury market. Between 70 and 75 percent of Treasury securities are held by domestic investors and the Federal Reserve, while an estimated 25 to 30 percent are held by foreign entities. A stable dollar plays a central role in maintaining foreign participation in the Treasury market. Persistent dollar depreciation can discourage foreign investors by increasing currency risk, thereby reducing demand for Treasuries and exerting upward pressure on yields.
Debt rollover dynamics amplify the importance of yield stability. The US Treasury refinances its obligations continuously, with roughly one-third of publicly held, marketable debt maturing within twelve months. At the same time, net interest outlays are now among the largest and fastest-growing components of the federal budget, typically ranking third or fourth among total expenditures. In this context, higher yields translate directly into higher borrowing costs, widening an already high fiscal deficit. From this standpoint, maintaining stable—or preferably declining—yields is not just desirable, but essential.
Long-term interest rates spill over into the real economy, particularly through housing finance. Mortgage rates are benchmarked against yields on thirty-year Treasury bonds. Among holders of these assets are foreign official institutions such as central banks and sovereign wealth funds, as well as foreign pension funds and insurance companies. For these investors, exchange-rate stability is especially important, as US Treasuries have long been regarded as among the safest global stores of value. Erosion of this perception through pursuing a sustained weaker-dollar policy could impact demand and asset prices.
As the dollar weakens, policymakers face tough choices
As trade uncertainty rises and official tolerance for a weaker dollar becomes more explicit, investors are increasingly hedging against a gradual erosion of dollar-system stability. While a depreciated dollar may support exports and advance trade rebalancing, it simultaneously encourages capital to rotate out of dollar-denominated assets and into gold and non-dollar alternatives, including the euro. This creates a core dilemma for US policymakers—particularly at Treasury and Commerce—because sustained dollar weakness risks pushing Treasury yields higher just as debt-refinancing needs and fiscal pressures intensify.
In the short term, this risk remains manageable. Despite last week’s dollar alarmism and gold rush, the dollar ultimately appreciated and gold prices fell back following the announcement of Kevin Warsh as chair of the Federal Reserve—a move investors interpreted as a signal of stability. The medium- to long-term risks, however, warrant closer attention: it is only a matter of time before another destabilizing announcement from the current administration, and policies that support trade in the short run may undermine financing conditions in the long run.
Daniel McDowell is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center.
Bart Piasecki is an assistant director at the Atlantic Council’s GeoEconomics Center.
Jessie Yin is an assistant director at the Atlantic Council’s GeoEconomics Center.
Image: People walk in front of a foreign currency exchange monitor .
