Claudio Wewel, Bank J. Safra Sarasin
The US dollar has weakened nearly 5% in trade-weighted terms since early April, with currencies like the Swiss franc seeing the strongest gains. Despite this pullback, the dollar remains historically strong. However, markets are becoming increasingly focused on the political forces shaping its future—and the signals coming from Washington suggest more turbulence ahead.
The Trump administration has made no secret of its desire to weaken the dollar. Combined with the broader uncertainty around US economic policy, this has created a complex backdrop for global investors. While short-term rebounds remain possible, especially if data temporarily supports growth, the underlying structural risks are mounting.
It is not yet clear where the US effective tariff rate will be once the 90-day pause for reciprocal tariffs ends on July 9. Yet it should be significantly higher than at the beginning of this year and hence the dollar should lose ground from a relative cyclical perspective once the new tariffs are kicking in. Moreover, the inconsistency and unpredictability of current US policies are undermining the country’s appeal as a safe haven. The resulting political uncertainty is discouraging foreign investment and prompting a gradual shift away from dollar-denominated reserves.
There is also a growing risk of further dollar weakness driven by policy experiments. Proposals such as issuing century bonds or imposing levies on foreign-held dollar reserves, while still hypothetical, add an additional layer of event-driven volatility. Should any of these ideas be implemented, a renewed dollar sell-off could follow.
Amid these shifts, the question of reserve currency leadership is once again up for debate. The dollar’s status as the world’s primary reserve asset has long been underpinned by the depth and liquidity of US financial markets, open capital flows, and the country’s military and institutional strength. Yet these foundations are no longer as unshakeable as they were once assumed.
The euro, as the second-largest reserve currency, is increasingly positioned to take on a more prominent role. Europe continues to make strides toward deeper integration, with several EU countries boosting defence spending and expanding cooperative frameworks. At the same time, major fiscal initiatives are growing the pool of euro-denominated assets, enhancing market depth and liquidity.
The rule of law, historically seen as a US strength, is now being questioned by some observers, which may give the euro a relative advantage. Although the dollar is unlikely to be replaced outright, reserve diversification is accelerating. A growing share of dollar reserves is being reallocated into gold, and other freely convertible currencies such as the Japanese yen, British pound, and Swiss franc are also seeing increased demand.
Cryptocurrencies have also entered the discussion. The Trump administration’s interest in building a crypto reserve, alongside developments in countries like Switzerland—where a referendum campaign is pushing for the Swiss National Bank to hold bitcoin—has raised questions about whether digital assets might play a future role in reserve management.
Yet for now, the extreme volatility and shallow liquidity of crypto markets remain major obstacles. Central banks need the ability to enter and exit reserve positions at scale and speed, and most crypto assets do not meet this requirement. Instead, attention is shifting toward Central Bank Digital Currencies (CBDCs), which offer a more controlled and stable path toward digital monetary innovation.
In politically non-aligned emerging economies, crypto may offer a more viable reserve alternative. These assets are less vulnerable to sanctions or political interference, making them appealing to governments seeking geopolitical insulation.
A weakening dollar also has implications for emerging market (EM) currencies more broadly. Typically, a softer dollar supports EM currency appreciation, but regional differences matter. In Asia, countries with strong external balances—such as Taiwan—have already seen sharp appreciation, reflecting local efforts to reduce exposure to dollar assets. By contrast, China is likely to resist major appreciation due to the burden of US tariffs and the desire to maintain export competitiveness.
The global currency landscape is entering a new phase. While the dollar’s dominance remains intact for now, shifting policies, reserve diversification, and technological change are all converging to reshape the foundations of the global monetary system.
