Dollar's Dominance Eroding as Investors Seek Alternative Safe Havens

Investors have stopped valuing the US dollar as a safe haven asset, a trend that began in 2023 and was exposed by President Donald Trump's tariffs in April 2025. The dollar dropped 6.5% against the euro in the three weeks following the tariff announcement, unlike previous episodes of turmoil where investors would rush into dollar assets.

Research by Arvind Krishnamurthy, a professor at Stanford Graduate School of Business, shows that the premium for holding dollar assets has been shrinking since 2023. This trend is also visible in dollar repo markets, where financial firms borrow cash by pledging US government bonds as collateral.

Krishnamurthy models a scenario in which foreign demand for dollar assets disappears entirely and predicts that the dollar would depreciate by about 7.6%. A more significant consequence of this loss of reserve currency status would be steeper borrowing costs, with interest rates rising by nearly a full percentage point as domestic investors absorb more Treasury issuance.

The loss of reserve currency status could lead to higher mortgage rates and have a greater impact on the US economy than a narrower trade deficit. Krishnamurthy notes that losing reserve currency status is not like a bank run, but rather a gradual transition over time.