The weakness of the US dollar isn’t arriving as a one-off shocker. Instead, it’s showing up as a structural drift, akin to a glacier movement downhill, with an occasional headline when a bigger piece of ice breaks and rolls off.
Although the dollar still remains central in the foreign trade, it’s no longer behaving – or being treated – like a classic safe-haven currency.
Over the past two decades, reserve managers have been quietly reducing the dollar’s share of global FX reserves. Not because the dollar “broke”, but because concentration risk has become too obvious to ignore. When a single currency dominates trade invoicing, global debt, and reserve portfolios, any rise in US fiscal, political, or sanctions risk becomes a portfolio construction problem.
The Currency Trinity
Reserve managers care about three things: liquidity, safety, and optionality. Liquidity still overwhelmingly favors the dollar.
However, safety is now under a closer look. Persistent fiscal deficits, rising debt, and willingness to weaponize the dollar system via sanctions all push reserve managers to hedge. Optionality has improved elsewhere. There are credible alternatives – the euro, yen, renminbi, gold, IMF special drawing rights, regional arrangements …The diversification is now rational, not ideological.
None of this produces a crash. Instead, small, continuous reallocations compound over time when you’re talking about trillions on central bank balance sheets. That’s why the dollar’s share of reserves can fall meaningfully even while it remains dominant in trade, funding, and debt markets. The story is dilution, not displacement.
At the same time, the market is hedging this regime shift through gold. Every step away from the dollar’s “risk-free” perception has sparked renewed interest in gold as a neutral, non-sanctionable asset. For many central banks, this isn’t about rhetoric on “de‑dollarization”; it’s balance‑sheet risk management.
“Risk‑Off” No Longer Means “Buy Dollars”
Recent research from CEPR shows that the dollar no longer fits in the same safe-haven category as the Japanese yen or Swiss franc.
Classical safe‑haven currencies tend to appreciate when risk sentiment sours, offering investors a kind of insurance. The yen and the franc are almost textbook cases, though the former is facing a crisis of its own.
The CEPR work shows that the dollar’s pattern is different. In ordinary risk‑off episodes driven by what the authors call “safe‑haven shocks”, the dollar does strengthen, but only briefly. That minor rally tends to fade within days.
More interestingly, during these same episodes, the dollar usually weakens against the yen and the franc, both of which deliver a more durable safe‑haven response. In that sense, the dollar behaves less as a hedge and more like a large asset with conditional defensive qualities.
A Conditional Hedge
Where the dollar stands head and shoulders above the rest is in periods of acute global funding stress. When the plumbing of the financial system clogs and needs the dollars, when cross-currency basis blows out, and interbank spreads jump… Then, the currency’s behavior flips to the dollar side.
Its safe‑haven role is therefore tied less to generic “risk‑off” and more to the specific question of whether the world is scrambling for dollar funding.
Seen through this lens, the post–”Liberation Day” weakness of the dollar looks much less puzzling. That episode clearly counted as a shock to risk sentiment, but it did not trigger a global scramble for dollar liquidity.
Despite the negative sentiment, these points do not argue for an imminent collapse of the dollar. Glaciers tend to only move so much per year. Rather, it is a transition away from an unipolar reserve regime.
The dollar is still at the core of global payments and funding, and it is still the currency the world scrambles for in a funding crisis. But in more ordinary risk‑off episodes, the defensive roles are now shared far more widely.
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