There is general agreement that a currency’s safe-haven status can be gauged by its response to changes in financial volatility. This column documents how, in the months following the Trump administration’s “Liberation Day” announcement, the dollar switched from rising during periods of market volatility to falling, and thus appeared to switch from a safe-haven to a ‘risk-on’ currency. Its reversion to traditional flight-to-safety behaviour in recent months may indicate that this ‘risk-on’ episode was a one-time event, but it is also possible that even as financial markets have calmed down, foreign entities are taking steps to reduce their dependence on the dollar for trade, payments, and investment.
Introduction
President Trump’s announcement of huge hikes in tariffs on 2 April 2025, which he labelled “Liberation Day,” triggered severe financial turmoil. Especially jarring for financial market participants and onlookers was the fact, shown below, that the dollar declined sharply even as the VIX index, a measure of financial volatility, soared upward. In large part reflecting the safety and liquidity of US Treasury securities, the dollar is a ‘flight-to-safety’ or ‘safe-haven’ currency, and generally rises during times of crisis. When the dollar fell instead of rising alongside the VIX after Liberation Day, this sparked widespread speculation that global investors, recoiling at the capricious and ill-considered policies of the Trump administration, no longer considered US investments to be safe assets – they were abandoning the dollar and signalling the end of its dominance in global financial markets.
Figure 1 VIX volatility index and DXY dollar index, 1 January to 26 August 2025
These concerns have been reinforced by the fact, shown in Figure 2, that the dollar has depreciated even as a key determinant – the difference between US and foreign interest rates – has largely moved sideways since the start of the Trump administration.
Figure 2 US-foreign yield differentials and DXY dollar index, 1 January 2021 to 26 August 2025
Do these developments mark a turning point for the global stature of the dollar? In this column, I assess the effect of Trump’s policies on the dollar’s global role, focusing on the behaviour of the dollar itself. Section 2 briefly documents the dominance of the dollar in the global economy and financial system. Section 3 reviews the reasons why the dollar is so dominant, while Section 4 explains why that dominance might be threatened by administration policies. Section 5 addresses whether a key indicator of the dollar’s dominance, the dollar’s flight-to-safety behaviour, has really disappeared. Section 6 concludes.
I find that Trump’s economic policies threaten many of the factors that have supported the dollar’s stature in global markets, including the prudence and predictability of US policies; the safety and depth of US capital markets, especially for Treasuries; the rule of law and investor protections; the dynamism of the US economy; and the nation’s strong allegiances with other Western liberal countries. These policies, and especially Trump’s shambolic announcement on Liberation Day, triggered not just declines in the dollar but also a statistically significant reversal of its traditional safe-haven response to financial volatility. To be sure, the safe-haven behaviour of the dollar is not the same thing as the dominance of the dollar more generally in international trade, payments, and investment. However, insofar as one of the most important factors supporting the dollar’s dominance has been the safety of dollar assets, and insofar as one of the hallmarks of a safe asset is that its value rises during times of volatility and uncertainty, this change in the dollar’s behaviour seemed to signal a weakening in the basis for the dollar’s supremacy in global financial markets.
In recent months, despite re-impositions of high tariffs following their initial retraction in mid-April, markets have calmed and the dollar’s safe-haven behaviour has reasserted itself. The implications of these developments for the future of dollar dominance are unclear, however. On the one hand, it could be that global investors have got over their initial disquiet over President Trump’s policies and that, barring future disruptive actions such as Liberation Day, the dollar will retain its status as a safe asset and premier vehicle currency. But, on the other hand, it could be that even as dollar behaviour has normalised, foreign commercial and financial enterprises are taking steps, which have yet to show up in the data, to reduce their dependence on the dollar for invoicing, payments, and investment. A weakening of the dollar’s status is all the more likely over the longer term if the policies undermining the currency’s global role – rising budget deficits and debts, attacks on the Federal Reserve, weakening of the rule of law, and ruptures with the US’ allies – are not reversed. Under those circumstances, the decline of dollar dominance would be among the least of the US’ problems.
Dollar dominance
Despite many headlines in recent years about ‘de-dollarisation’, the dollar has retained its role as the world’s dominant currency (Boocker and Wessel 2023, J.P. Morgan 2025b, Bertaut et al. 2025). First, despite some movement of energy in non-dollar currencies, nearly all globally traded commodities are priced in dollars (Rees 2025, J.P. Morgan 2025a).
Second, as indicated below, the dollar remains the most important currency used in payments for international trade everywhere but in Europe. As of 2022, 54% of global trade was invoiced in dollars, compared to the share of the US in global trade of close to 10% (Boocker and Wessel 2024).
Figure 3 Currency shares in export invoicing, 1999-2019
Source: Bertaut et al. (2025).
Finally, the dollar retains it predominant position in terms of international saving, investment, and intermediation. As indicated in Figure 4, the dollar share of international financial transactions well exceeds US shares in global output and trade.
Figure 4 Dollar shares in global transactions
Source: Bank for International Settlements (2020).
Since publication of this chart in 2020, the share of the dollar in official reserve holdings has edged down only slightly, from 60% to about 57%; the share in China’s renminbi remains miniscule. As discussed in Bertaut et al. (2025), the share of the dollar in most other international financial transactions also remains undiminished from 2020.
Figure 5 Currency shares in international reserve holdings
Source: Bertaut et al. (2025)
Factors underpinning dollar dominance
The factors underpinning the dollar’s dominance in global markets are well known, and there are many of them (Kamin and Sobel 2024):
- The prudence and predictability of US economic and monetary policy.
- The safety and liquidity of US Treasuries.
- The openness, breadth, and depth of US capital markets – both sovereign and private.
- The rule of law. US residents and foreigners receive the same investor protections, subject to national security considerations.
- The sheer size of the US economy and financial system. The US accounts for roughly a quarter of global GDP and more than 50% of global stock market capitalisation (The Economist 2024)
- The outsized performance of the US economy. Often labelled ‘American exceptionalism’, the US economy has outpaced most other advanced economies (J.P. Morgan 2025a).
- The US’ strong military/political allegiances with other Western liberal countries. Some three-quarters of foreign government holdings of US safe assets are by countries with some form of military tie to the US (Weiss 2022). US allies are more inclined to rely on the dollar and less prone to diversify (Eichengreen et al. 2017).
- The lack of viable alternatives to the dollar. The euro remains hampered by the lack of a deep, liquid sovereign Eurobond market (Nelson 2025). Foreign demand for China’s renminbi is limited by its capital controls, faltering growth, and erosion of trust in the rule of law (Kamin and Sobel 2024a). Most crypto assets are too volatile to qualify for generalised usage, while stablecoins are usually pegged to dollar assets and thus would not detract from dollar usage.
- Network effects – everyone uses the dollar because everyone else uses the dollar. The challenging currency would need to overcome the advantage of the large infrastructure already built around dollar use (Kamin and Sobel,2024a).
The challenge to dollar dominance from Trump’s economic policies
While the dollar’s dominance is supported by a multitude of factors, many of those are threatened by the Trump administration’s policies:
- Policies that undermine the vitality of the US economy. These include high trade barriers, reduced immigration, mounting fiscal debt, and reduced support for research and development.
- Policies that undermine the prudence and predictability of economic policymaking. These are best exemplified by Trump’s chaotic, capricious, and disruptive trade policies.
- Policies that undermine the independence of the Federal Reserve. ‘Nuff said.
- Policies that threaten the safety of US Treasury securities. The “One Big Beautiful Bill” is set to further widen fiscal deficits (Committee for a Responsible Federal Budget 2025). Even if this effect is fully offset by increased tariff revenues (Mangan 2025), this still leaves the federal budget on an unsustainable trajectory, putting solvency at risk.
- Policies that undermine our allegiances with allies and trading partners. Trump’s tariffs on the US’ closest allies, his antipathy toward international economic and security cooperation, and his ambiguous stance on Russia/Ukraine weaken long-standing international relationships (Kamin and Sobel 2024b, 2025).
- Threats to open capital accounts and foreign investor protections. The views of Trump administration officials and Republican legislators raise concerns about future prospects for investor protection and free capital flows. The original “One Big Beautiful Bill” approved by the House of Representatives included taxes on earnings by foreign investors and remittances abroad by non-citizens (CRE Finance Council 2025, Veuger and Pomerleau 2025).
- Threats to the stability of the dollar-based global monetary system. Trump administration official Stephen Miran has (before his appointment) floated a ‘Mar-a-Lago plan’ that includes terming out foreign-held US Treasuries, imposing a ‘user fee’ on their servicing, and potentially even a freeze on Treasury repayments (Miran 2024, Eichengreen 2025). Administration attitudes toward international cooperation also raise concerns about its commitment to international financial standards and future availability of Federal Reserve dollar swap lines (Gensler et al. 2025, McCauley 2025).
What has happened to the safe-haven behaviour of the dollar?
Although the international role of the dollar is deeply entrenched, the actions of the Trump administration would appear to undermine the factors supporting dollar dominance. Has this already started to occur? One way to address this question is to assess whether the dollar has stopped behaving as a safe-haven for international investors, that is, as a safe asset whose demand rises during times of crisis. Being a safe-haven is not the same as being a dominant global currency – the latter entails being a primary currency for international pricing, payments, investment, and saving. However, insofar as one of the main reasons for the dollar’s supremacy is the safety and liquidity of dollar investments, any diminution of the dollar’s safe-haven status is likely to undermine its broader role as a globally dominant currency.
There is general agreement that a currency’s status as a safe haven can be gauged by its response to changes in financial volatility – that is, its value should rise as volatility increases. (Ranaldo and Söderlind 2010, Habib and Stracca 2012, De Bock and de Carvalho Filho 2015.) As noted in the introduction, since Liberation Day, there has been considerable discussion in the financial media of the apparent switch in the dollar from a ‘risk-off’ to a ‘risk-on’ currency. Aside from Hartley and Rebucci (2025), who focus on worries about equity earnings, the few empirical studies of this issue confirm the shift in the dollar’s safe-haven status. Collyns and Klein (2025) find the recent dollar declines in response to heightened policy uncertainty to be historically unusual. Grothe et al. (2025) find that the co-movement of the dollar with market volatility shifted from generally positive to negative in April 2025, while Jiang et al. (2025) tie this shift to a decline in the ‘convenience yield’ (the implicit benefits of safety and liquidity, which lead investors to accept lower yields) offered by US Treasuries.
However, all these studies focus on the immediate aftermath of Liberation Day rather than on more recent developments. To assess the behaviour of the dollar over a longer period, and following the standard literature (Obstfeld and Zhou 2022, Engel and Wu, 2023), I estimated a model for the DXY index of the dollar based on (1) the difference between US and foreign yields, and (2) the VIX. 1 The model fits well, with the coefficients on the interest rate differential and the VIX being statistically significant and correctly (positively) signed.
As shown in Figure 6, the model tracks the dollar reasonably well for most of the estimation period. However, like the interest rate differential shown in Figure 2, the model predicts only a small decline during 2025, even as the actual dollar plunges by about 10%. This could be interpreted as prima facie evidence of a rejection of the dollar’s privileged status by global investors.
Figure 6 Actual and in-sample predicted values of the DXY dollar based on regression #1
However, such a conclusion would be premature. First, the factors pushing the dollar down could be unrelated to the international role of the dollar – for example, worries about US rates of return not captured by interest rate differentials. Second, the model clearly is subject to large and persistent errors, so one should not place too much weight on the 2025 errors alone. Finally, the dollar has fallen only a little below its range of the past few years.
Accordingly, to assess a possible shift in the dollar’s dominant status, I focus on the dollar’s sensitivity to changes in market volatility, as discussed at the beginning of this section. Figure 7 tracks the model’s coefficient on changes in the VIX, which is estimated for 30-day moving windows over the course of our four-year estimation sample. For nearly all of that sample, the estimated sensitivity was positive, indicating the dollar rose with financial volatility. The estimated sensitivity shifted from positive to negative shortly after Liberation Day, eventually falling to its most negative level of the entire sample period. So, clearly, the events of Liberation Day and its aftermath exerted a profound effect on the behaviour of the dollar, shifting it from a flight-to-safety asset to a ‘risk-on’ asset such as an emerging market currency.
Figure 7 Estimated sensitivity of the dollar to the VIX in regression #2
However, the sensitivity of the dollar to the VIX started to reverse its earlier sharp decline starting in June and has since moved back into its earlier positive range. This suggests that, at least for now, markets have got over the shock of Liberation Day, and the dollar has reverted to its earlier safe-haven behaviour. That conclusion is buttressed by data on capital flows, which indicate that net foreign purchases of US assets turned negative in April but turned back positive in May and June (Slok 2025).
To be sure, the dollar remains lower than it was earlier this year, and as noted above, that cannot be explained by interest rate differentials. Slok and Thomas (2025) find that adding proxies for Liberation Day, trade policy uncertainty, and media mentions of the Mar-a-Lago Accord help explain this decline. However, these developments don’t necessarily reflect a change in the global status of the dollar. Nor does another potential explanation, which is that foreigners have reacted to heightened volatility by hedging their US investments, thereby lowering the dollar (Shin et al. 2025). Thus, while the events of this year have prompted a level-shift downward in the dollar’s value, we have no evidence as yet that it has led to a more lasting reduction in the dollar’s global dominance.
Conclusion
A key factor underpinning the dollar’s dominance in global financial markets has been the perceived safety and liquidity of dollar assets. I have confirmed anecdotal reports that in the months since Liberation Day, the dollar switched from rising during periods of financial market volatility to falling – it thus appeared to switch from being a safe-haven currency to a ‘risk-on’ currency. That shift in investor attitudes toward the dollar likely was triggered by Trump’s chaotic tariff announcements, which added to a barrage of policy moves threatening to undermine the dollar’s global stature.
However, in recent months, as markets have become more comfortable with (or, at least, acquiescent to) Trump’s actions, the dollar has reverted to its traditional flight-to-safety behaviour. It is thus possible that the ‘risk-on’ episode after Liberation Day was a one-time event and that, barring future Liberation Days, the dollar will retain its status as a safe asset and dominant currency. But it is also possible that even as financial markets have calmed down, foreign entities are taking steps to reduce their dependence on the dollar for trade, payments, and investment; it would take some time for such developments to show up in data on international transactions. A weakening of the dollar’s pivotal role will be all the more likely in the coming years if current and future administrations continue to take actions that distort the US economy, undermine fiscal solvency, threaten central bank independence, and undermine global allegiances. And the consequences of those actions will go well beyond the loss of dollar dominance.
Source : VOXeu
