US dollar: The Greenback Under Pressure

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  Serge Nussbaumer
  Chefredaktor

During the American Civil War in 1861 and 1862, dollar banknotes with a green reverse were printed for the first time. The so-called “greenback” was intended to emphasize the strength and stability of the US government. Even back then, the color green was a symbol of trust and hope and also had a calming effect. Around 160 years later, “greenback” stands for the US dollar, the world’s leading currency, in stock market jargon. Over half of global trade is conducted in dollars. At the same time, the USA attracts large amounts of foreign capital as a safe haven. According to the US Federal Reserve, assets held by international investors amounted to around USD 57 trillion at the end of 2024 (see chart 1). In addition to direct investments, the majority of this is accounted for by equities and government and corporate bonds.

China is no longer the largest buyer of US government bonds. This role has now been taken over by other countries. Japan and European countries in particular have increased their exposure to US government bonds in order to partially close the gap that has arisen (see chart 2). The UK and other Asian and Arab countries are also increasingly acting as buyers, thus contributing to the diversification of the buyer structure of US government bonds. This illustrates an important change in the international financial structure and underlines the fact that global investors’ confidence in US securities can no longer be regarded as uniform.

Unique success model

The steady inflow of funds helped the United States to finance its growing trade deficit. At the same time, lenders could rely on the high creditworthiness of US borrowers and fair market conditions. This system was driven by the robust growth of the world’s largest economy. To a certain extent, the US Federal Reserve took on the role of a control room and provided the financial markets with the necessary lubricant. “An independent Federal Reserve is prepared to act as the lender of last resort, ensuring market liquidity and stability,” explains J. P. Morgan. However, the major New York bank is one of the voices that are increasingly critical of the US dollar’s special status. “International investors are beginning to question the ‘exorbitant privilege’ and the status of the dollar as a safe haven”, warn its economists.

Playful trust

The man for whom the motto “Make America Great Again” actually stands above all else is a source of doubt. Since Donald Trump returned to the White House in January, he has triggered moments of shock on an almost daily basis. A temporary highlight was April 2, which was announced as “Liberation Day”. On this day, Trump took out the tariff hammer and threatened the USA’s trading partners with high import duties. As is well known, he backed down just over a week later. On April 9, the Republican suspended the controversial tariffs – with the exception of China. This was preceded by a sell-off on the US government bond market. Investors threw Treasuries out of their portfolios in a big way. Although the dust has settled somewhat and Washington is now moving closer to Beijing in terms of trade policy, confidence is gone for the time being.

This is demonstrated not least by the further rise in yields on Treasuries. At the same time, the greenback is under pressure. In April, the US dollar index fell to its lowest level for more than three years. This benchmark tracks the development of the US currency against the means of payment of important trading partners.

Trump has further reinforced the “Sell America!” motto that is rampant on the capital markets with attacks on the independence of the central bank. As the consequences of the tariff hammer on the economy and inflation are not yet clear, the Fed is taking a wait-and-see approach. The President, on the other hand, is calling for interest rate cuts and is not shying away from personal attacks. Among other things, he called Fed President Jerome Powell “Mr. Too Late” and a “big loser”.

Expensive gifts

In contrast, Trump goes into raptures when it comes to his budget policy. At the end of May, the “Big Beautiful Bill” passed the House of Representatives. This is what the President calls a legislative package that is intended to bring massive tax cuts for the American people. But gifts cost money. The Congressional Budget Office (CBO) has calculated that the relief could increase the national deficit by almost USD 3.8 trillion. In view of a mountain of debt currently amounting to almost USD 37 trillion, it is not surprising that Trump’s “Big Beautiful Bill” is not scoring points on the capital markets. On the contrary: with Moody’s, the third major US rating agency has now also downgraded the creditworthiness of the USA.

The US dollar index is threatening to fall below the important support level of 100 points. J.P. Morgan does not expect this support level to hold and has set the price target for the end of the year at 95 points. In addition to fundamental arguments, the currency experts also point to the effect of mean reversion: over time, currencies tend to return to their long-term averages. Despite the recent correction, the US dollar index is still well above the average value of the past 20 years, as chart 3 shows.

It remains to be seen whether the US government will succeed in regaining the full confidence of the markets. In any case, pressure on Trump is increasing even within his own party. With a view to the 2026 mid-term elections, many Republicans fear for their political future.

Popular alternatives

One thing is certain: Investors are increasingly turning to alternative currencies. Gold in particular is currently experiencing a real boom. Not only institutional and private investors are turning to the precious metal, but also central banks, which are using it to diversify their currency reserves.

In the first five months of this year alone, the price of the troy ounce rose by around a quarter to around USD 3,300. Bitcoin also increased significantly and is currently trading around 18% above its level at the end of 2024. Demand for the most important cryptocurrency is not only being driven by the weakness of the dollar. An additional driver is Donald Trump’s pronounced sympathy for this asset class. He has announced government support measures and deregulation of the market and even has plans for a national Bitcoin reserve.

It’s not that far yet. But the unpredictable and power-conscious US president is causing the global currency system to shake noticeably. Nevertheless, the greenback has survived many crises and setbacks in its history – its green has never completely faded.