Goldman Sachs and Bank of America have issued warnings that tariff threats and the Federal Reserve's potential aggressive interest rate cuts are undermining the U.S. dollar's status as the global reserve currency. Investors are increasingly turning to gold and other safe-haven assets.
In 2025, the dollar experienced its largest annual decline in eight years. Despite continued assertions from some Trump administration officials that the White House supports a "strong dollar," investors appear unconvinced.
Even with a recent rebound, the U.S. dollar index remains approximately 1% lower than its level at the start of the year, extending a 9% decline from 2025.
"Fundamentally, we believe the recent injection of policy uncertainty will persist long enough to prevent the dollar from recouping its losses," Goldman Sachs currency strategists noted in a recent client report. "Investors began the year expecting more support for the economic cycle, but a series of new tariff threats have shaken those expectations."
The dollar, long considered a bulwark of the global economy, fell more than 5% in the days following President Trump's initial announcement of his "Liberation Day" tariffs in April last year. Nearly a year later, the currency has yet to recover those losses.
For decades, the dollar has been regarded as the world's reserve currency, often referred to as the "exorbitant privilege" enjoyed by the United States. This status has allowed the dollar and dollar-denominated assets to serve as safe havens during periods of market turmoil.
"If the dollar's reserve status indeed depends on America's role in the world—as a guarantor of a secure and rules-based order—then the events of the past year... plant the seeds for a reallocation of assets away from the dollar and toward alternatives," said Thierry Wizman, global FX and rates strategist at Macquarie.
Markets are also assessing the potential shift in U.S. monetary policy under Kevin Warsh, a former Federal Reserve governor nominated by President Trump to chair the Fed.
Although Warsh is a recognized monetary hawk whose first term at the Fed occurred during the 2008 financial crisis, news of his nomination provided only a brief boost to the dollar. Investors are already pricing in expectations for aggressive rate cuts under a Warsh-led Fed.
In comments to NBC News, President Trump stated he would not have nominated Warsh for Fed chair if Warsh had expressed any interest in raising rates.
"If he came in and said, 'I want to raise rates'... he wouldn't have gotten the job, no way," Trump said on February 4. He asserted that the Fed would undoubtedly cut rates because "our rates are too high."
Nevertheless, while the dollar remains the anchor of the international financial system, traders are increasingly seeking other hedging instruments—from the euro and Swiss franc to gold—as geopolitical risks and policy uncertainties mount. This is particularly relevant given that the source of this uncertainty often originates from the U.S. government itself.
"We do not believe the 'diversification trade' away from the dollar is over in the medium to long term," Macquarie's Wizman noted. He pointed out that waves of dollar weakness, typically triggered by significant U.S. geopolitical shifts and policy uncertainty, can last a decade or longer.
"Given the direction the U.S. government appears to be taking America in its relationship with the rest of the world, the dollar cannot indefinitely maintain its reserve currency status," Wizman added.
Gold appreciated more than 60% in 2025, marking one of its strongest rallies on record. Despite a recent pullback, the precious metal remains over 70% higher than its level a year ago.
Other metals, including precious silver and platinum, as well as industrial products like copper and steel, have continued to surge alongside gold as 2026 begins.
"A key accelerator behind the resurgence in demand for hard assets is the U.S. dollar," wrote Ole Sloth Hansen, head of commodity strategy at Saxo Bank, in a recent client report. Hansen stated that concerns about U.S. stability and increasing capital flows to other markets are merely "exacerbating the currency's already fragile backdrop."
Other major currencies, including the euro, British pound, and Swiss franc, have also rallied against the dollar over the past month. The same applies to higher-risk emerging market currencies, which typically trade at a significant discount to the dollar, from the Brazilian real and Mexican peso to the South African rand.
Economists at Bank of America cautioned in a recent client report that it might be premature to label the current volatility in forex pairs as a sign of a dollar devaluation. The bank suggests that in a true devaluation scenario, investors would witness a prolonged decline in the dollar accompanied by falling valuations of other U.S. financial assets.
Even so, the dollar's recent movements show initial signs that differ from cyclical currency fluctuations and hint at a broader structural shift in investor preferences. Bank of America believes the dollar may have further room to fall, as the "fundamental drivers" behind its weakness—such as the Fed's dovish pivot and the lagged effects of trade wars—have not yet fully played out.
"Currently, there is no good substitute for the U.S. dollar as a global currency," wrote former Fed international finance director Steven Kamin in a recent column. "The United States still possesses the world's deepest, most liquid open capital markets."
"But, while it was difficult to envision a world without dollar dominance just a few years ago," he added, "it is now easy to imagine such a scenario unfolding over the coming decades."
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