The economic and political shock of President Trump’s global tariff salvoes have sparked a fresh search for signs of change.
For decades, speculation about the dollar losing its supremacy among world currencies proved baseless. But as the US federal debt soars, its government is beset with gridlock and the Federal Reserve’s independence has been attacked, international holders, especially central banks, are quietly seeking alternatives.
US politicians of both parties have been sounding the alarm on debt for years. But the situation has only got more and more dire. “Every fiscal warning light there is is just flashing bright red right now,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, at the Institute of International Finance’s meetings on Wednesday.
The US budget deficit shrank 2.3% in the fiscal year to September 2025, after President Donald Trump’s tariff policies raised customs revenue by 150%. But that chipped only $118bn off a deficit that is still $1.775tr.
At 5.9%, the US budget deficit as a share of GDP has never been this high outside a crisis.
JP Morgan Asset Management said that without a “somewhat artificial $234bn reduction” from changes in the capitalised value of student loan programmes, the deficit would have grown.
Surprisingly, under Trump’s influence the 2025 result was a 6% increase in revenue to $5.2tr, the highest ever, and a 4% rise in spending to a record $7tr.
“The question I am asked most frequently by investors and financial advisors is when is the federal debt going to blow up in all of our faces,” wrote David Kelly, chief global strategist at JP Morgan Asset Management, in a recent blog post. “My usual answer is that, while we are going broke, we are going broke slowly.”
Interest payments are now the second largest item in the federal budget and two major trust funds — Social Security’s Old-Age and Survivors Insurance and the Medicare Hospital Insurance — are projected to be insolvent within the next seven years.
Despite this bleak outlook, there appears to be “nobody who’s able to convince policymakers to make the hard choices that we need,” MacGuineas told GlobalMarkets. “Instead, it’s a competition for who can give away more.”
Locking up dollars
Another shock to international confidence in the dollar came when Russia invaded Ukraine in 2022. The US used its currency and payment channels to sanction Russia.
That unsettled some central banks, which have traditionally seen dollar reserves as the safest haven.
So far, although the dollar has weakened this year, it remains fairly stable, thanks to robust economic growth and a resilient stockmarket.
But Beth Anne Wilson, director of international finance at the Federal Reserve Board, said this did not mean there were no shifts beneath the surface.
She likened investors reconsidering their dollar holdings to dissatisfied employees looking for a better job. “We’ve all had those bad days at the office when we think, ‘Oh, I should just quit this job’,” she told a panel on dollar dominance. “Most of the time, we don’t — but it may start us thinking about brushing up our résumé, looking at other options.”
The US has given investors no shortage of reasons to think about shifting. The more central banks insist on running economies hot, the more likely are runs on fiat currencies.
“The dollar might or might not be the most vulnerable,” said Pablo Goldberg, head of research and portfolio manager for emerging market debt at BlackRock.
A new risk brought by Trump is the Fed losing its independence. He has repeatedly browbeaten Fed chair Jerome Powell and sometimes talked of ousting him, even though Trump has tended to cool his rhetoric when markets got jittery. This is clearly bad for trust in the dollar.
Lori Heinel, global chief investment officer at State Street Investment Management, said that although the majority of global flows still went to the US, there were signs of a shift in fixed income. “You’re not seeing the same buying pattern you used to,” she said. China and Japan were no longer “stalwart investors” in US debt and “even emerging markets [are] becoming less interested in [the] US,” she said.
This may be contributing to strange signs emanating from the capital markets. A 2027 bond from Microsoft — which boasts triple-A ratings — recently traded 1.9bp inside Treasuries, Bloomberg reported.
The US government, of course, has no triple-A ratings left and credit risk is becoming an issue. “There’s quite a lot of evidence that the market is getting more worried about this,” said Brian Coulton, chief economist at Fitch Ratings, at a panel on the US economy. He pointed out that Treasury spreads had widened after both the US’s last two downgrades — by S&P in 2023 and Moody’s earlier this year.
“We’ve seen where the Treasury announces revised borrowing schedules the market moves,” Coulton said. “We’ve seen the 30 year yield stay very high and the term premium revert to nearly 1%.”
Gold rush
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, said there had been signs of stress in official reserve data since 2022 — the year sanctions began to cut Russia out of the dollar-based financial system.
“Central banks are actively diversifying, and we know which ones of them are doing that the most — China and Russia,” he said.
The dollar could also be vulnerable as a store of value, Ahmed added. “That’s where gold has played an important role — its share of central bank reserves has risen from 14% five or six years ago to about 20% now,” he said. “I don’t see any force on the planet stopping these central banks adding to this.”
Kelly at JP Morgan pointed out the US could still borrow for 30 years at 4.6%, suggesting it had plenty of leeway to borrow more. “That being said, there is a danger that political choices lead to a faster deterioration in the federal finances, leading to a back-up in long term interest rates and a lower dollar,” he said. “Based on current allocations and valuations alone, many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today.”
The erosion of the dollar’s dominance may already have started — even if investors are still hesitating before handing in their notice.
“Because in the end, the dollar isn’t a burger-flipping job,” said Wilson at the Fed. “It’s a really good job. You’re going to think long and hard before you leave it.”
Additional reporting by Jon Hay