The dollar's position as the world's reserve currency, a position it has held since at least 1945, could be under threat.
Recent weakness in financial markets has been accompanied by a sell-off in the US dollar. Along with a sell-off in equities and bonds, the dollar has fallen to its lowest level since 2022, down over 9% against a basket of currencies since the start of the year. This inverts the usual relationship in which investors move into dollars in times of elevated risk. America's vast economy, backed by strong institutions and stable government, has long been seen as a safe haven in times of elevated risk. Yet recent uncertainties, triggered by shifts in US trade policy have seen investors shun the dollar and flock to other currencies, including the Swiss franc and the Japanese yen. Yesterday's further sell-off in US equities and the dollar came in the wake of a social media post from Donald Trump calling on the Federal Reserve to cut interest rates immediately. The Fed has significant operational independence, including over interest rates, and such interventions are highly unusual. Under current plans, US tariffs are set to rise to the highest level since the 1930s, more than ten times higher than at the start of this year. This is arguably the most momentous break in US economic policy since America's abandonment of gold convertibility in 1971. The current US administration's departure from the free trade consensus of the last 80 years has prompted speculation about previously unthinkable outcomes, such as selective treasury defaults or the withdrawal of federal dollar swap lines to allies. The sell-off in the dollar, shifts in US trade policy and speculation about even more radical policies – all raise the question of whether the dollar's position as the world's reserve currency, a position it has held since at least 1945, could be threatened. Reserve currencies are held in significant quantities by other central banks as part of their reserves – which can be used if necessary to buy imports, meet international debt obligations or influence the domestic exchange…