Falling Dollar: What Are the Consequences for the Global Monetary Landscape?

Since spring 2024, the US dollar has experienced a significant decline on foreign exchange markets, gradually losing value against the world’s major currencies. This depreciation of the greenback raises numerous questions: what are the causes? Who stands to gain or lose from it? What are the global implications? This phenomenon, both cyclical and strategic, also prompts a deeper reflection on the long-term viability of the dollar’s supremacy in the international monetary order. Insights from Émilie Laffiteau, macroeconomist and associate researcher at IRIS.

Why is the dollar falling?

The fall of the dollar since April 2024 stems from a combination of two factors. On the one hand, a loosening of monetary policy by the United States Federal Reserve (FED). Like other central banks around the world, the FED had adopted a restrictive monetary policy between 2022 and 2024 in order to contain the inflation triggered by the post-Covid-19 effects and the outbreak of war in Ukraine. With inflation returning under control by mid-2024, the FED began lowering its key interest rates. On the other hand, the statements and positions taken by Donald Trump and his administration, both in trade and geopolitical terms, have increased uncertainty. This instability has fuelled financial market distrust towards US assets, leading to a decline in demand.

This situation is not at odds with the economic vision of the new administration. According to the Mar-a-Lago doctrine and the repeated statements of current economic adviser Stephen Miran, a weaker dollar is necessary to reduce the trade deficit, a central objective of Donald Trump’s programme. In line with the well-known sovereigntist slogan “America First”, the aim is to reduce imports, relocate production and supply chains to the United States, and promote the expansion of American exports worldwide.

This approach marks a turning point compared to previous administrations, which had never truly concerned themselves with the trade deficit, traditionally offset by a surplus in the capital account. In other words, net outflows of dollars through trade (goods and services) were balanced by net capital inflows (Treasury bonds, corporate shares, etc.). Donald Trump, however, is aiming for a double surplus: both trade and financial. This requires a depreciation of the dollar to make the American economy more competitive internationally, without calling into question the supremacy of the greenback as the world’s reserve currency.

Does the dollar’s decline call its global supremacy into question?

In recent years, there has been a rise in “de-dollarisation” ambitions, particularly among BRICS countries. Several bilateral agreements have been concluded, notably by China with partners such as Brazil, Russia, and Saudi Arabia, to conduct part of their trade in national currencies. This move is explicitly aimed at bypassing the US dollar, prompting hostile reactions from the American administration. At the same time, certain central banks, notably in China and Russia, have begun reducing the share of the dollar in their foreign exchange reserves, favouring other currencies or assets such as gold. These dynamics, coupled with a recent decline in demand for US assets, have contributed to a gradual erosion of the dollar’s role, both as a medium of international exchange and as a global store of value.

However, monetary systems are subject to long-term inertia. Since the end of the Second World War and the establishment of the international monetary system based on the dollar, it has remained the world’s main reference currency. As an example, when Air France buys planes from Airbus — a European manufacturer — contracts are still drawn up in dollars. Moreover, US Treasury bonds are still considered the safest and most liquid assets in the world. Today, the dollar still accounts for around 60% of global foreign exchange reserves, compared with approximately 20% for the euro, 5% for the yen, 4% for the pound sterling, and only 2 to 3% for the yuan, despite China’s economic clout.

No credible alternative currently appears able to dethrone the dollar as the international monetary anchor. The euro has not benefited from the dollar’s recent decline: instead, demand has shifted towards gold and emerging market assets, particularly in Asia. Furthermore, for the euro to seriously rival the dollar, the European Union would need to issue mutualised sovereign debt instruments (European Treasury bonds) on a large and sustainable scale. This would require the creation of a European budget — a prospect to which Member States remain largely opposed for now.

Who benefits from this monetary trend? Who suffers? More broadly, should this dollar decline be a source of concern globally?

The current weakness of the dollar mainly benefits American exporters, whose price competitiveness has automatically improved on international markets. Moreover, the debt servicing of emerging and developing countries, contracted in dollars, has decreased once converted into local currencies, offering much-needed fiscal breathing room. Additionally, there has recently been a shift in demand from dollar-denominated assets to safe havens like gold or bonds issued by emerging countries, which are seen as more attractive in the current climate.

Conversely, American importers face a significant increase in the cost of their inputs. As substitution capabilities and value chain reconfigurations are not immediate — at least in the short term — it is consumers who risk bearing the brunt, unless compensatory policies are implemented. Similarly, foreign investors receiving dividends in dollars see the value of their income fall once converted into their own currencies.

But the main concern surrounding the dollar’s decline lies in the risk of triggering a “currency war”. The current turbulence around the US currency is contributing to a dual fragmentation of the global monetary system. On the one hand, it is reinforcing the formation of “blocs”, mirroring trade and geopolitical tensions, thereby increasing the risk of a global financial crisis. On the other hand, it is intensifying the confrontation between sovereign currencies (issued by central banks) and private currencies, such as bitcoin. Faced with this second form of fragmentation, the international monetary system still appears ill-equipped to guarantee lasting stability.