U.S. Dollar Depreciation Risks Amid Trump's Tariffs: Geopolitical Policy Shifts and the Erosion of Reserve Currency Dominance

The U.S. dollar's global reserve currency status, long considered a cornerstone of the post-World War II financial order, faces mounting challenges as geopolitical policies-particularly Trump's aggressive tariff agenda-introduce volatility and uncertainty. While the dollar still commands 56.92% of global foreign exchange reserves in Q3 2025, down slightly from 57.08% in Q2, the trajectory of de-dollarization has accelerated over the past decade, driven by central bank diversification, rising inflation, and the weaponization of the dollar through sanctions. This article examines how Trump's tariffs, coupled with broader geopolitical tensions, are reshaping global reserve currency dynamics and sovereign debt strategies, with significant implications for investors.

The Immediate Impact of Trump's Tariffs on the Dollar

Trump's "Liberation Day" tariff hikes in April 2025 triggered an immediate and sharp depreciation of the U.S. dollar, even as financial volatility surged. The VIX index, a key gauge of market anxiety, spiked to multi-year highs, signaling a loss of confidence in the dollar's traditional safe-haven status. Stanford economists Arvind Krishnamurthy and Hanno Lustig note that international investors began to question the safety of dollar-denominated assets, with the U.S. Treasury market showing signs of distress- rising yields and deteriorating premiums relative to German bunds.

J.P. Morgan Global Research has maintained a bearish outlook, predicting continued dollar depreciation due to U.S. economic moderation, high tariffs, and policy uncertainty. These tariffs, while inflationary for the U.S., are deflationary for the rest of the world, further weakening the dollar's appeal. The euro, meanwhile, is poised to benefit from German fiscal support and a potential pause in the European Central Bank's easing cycle, with EUR/USD projected to reach 1.22 by mid-2026.

Long-Term De-Dollarization Trends and Central Bank Responses

The erosion of the dollar's dominance is not merely a short-term phenomenon but part of a broader, long-term shift. Central banks are increasingly diversifying their reserves into non-dollar assets, including the euro, yuan, and gold. A 2025 survey by Central Banking Publications found that 44.3% of 88 central banks cited U.S. protectionist policies as the most significant risk, prompting over two-thirds to adjust their reserve management strategies.

Sovereign Debt Strategies and the Rise of Local Currency Settlements

Non-U.S. countries are also recalibrating their sovereign debt strategies to mitigate exposure to dollar volatility. BRICS nations, including Russia and China, have accelerated the use of local currencies in bilateral trade. Russia, for instance, has shifted the majority of its trade with China and India to national currencies, reducing reliance on the dollar after Western sanctions. Similarly, China's yuan-denominated trade has grown by 30%-40% annually since 2022, supported by initiatives like the BRICS Pay digital currency platform.

The U.S. fiscal trajectory has further incentivized this shift. Multiple sovereign credit rating downgrades from agencies like Fitch and Moody's have eroded confidence in dollar-denominated assets. At the same time, the weaponization of the dollar-exemplified by sanctions against Russia post-Ukraine invasion-has accelerated de-dollarization as countries seek to insulate their financial systems from external pressures.

Implications for Investors

For investors, the risks of dollar depreciation are compounded by the geopolitical and economic uncertainties introduced by Trump's tariffs. The U.S. budget deficit, which reached $1.8 trillion in FY 2025, and the potential for further legal challenges to tariffs (e.g., the Supreme Court's IEEPA tariff decision) add layers of volatility to Treasury markets.

Diversification into non-dollar assets-such as euros, yuan, gold, and emerging market equities-may offer hedging opportunities. However, investors must also navigate the complexities of regional trade dynamics and the rise of digital currencies. China's digital yuan, for instance, could play a pivotal role in reshaping global payment systems, particularly in regions seeking alternatives to SWIFT.

Conclusion

While the U.S. dollar remains the dominant reserve currency, its long-term supremacy is increasingly contested. Trump's tariffs, combined with de-dollarization efforts and geopolitical realignments, are reshaping global financial architecture. Central banks and sovereign actors are proactively adjusting their strategies, prioritizing fiscal sustainability and regional cooperation. For investors, the path forward demands vigilance in navigating currency risks, embracing diversification, and monitoring the evolving interplay between policy and markets.