Trump 2.0 and the Future of Dollar Dominance
The Association of Foreign Press Correspondents (AFPC-USA) hosted “Trump 2.0 and the Future of Dollar Dominance,” a Foreign Press Podcast episode produced in partnership with the Hinrich Foundation.
The US dollar has underpinned the global financial system for decades, but its dominance is facing mounting challenges. In a new paper for the Hinrich Foundation titled “Trump 2.0 and dollar dominance: Make or break?”, economist Stewart Paterson argues that a combination of weakening US economic fundamentals, shifting geopolitical alliances, and rapid advances in financial technology are creating the most serious test yet to the dollar's global supremacy. While China's renminbi (RMB) is emerging as the most credible long-term challenger, Paterson contends that Beijing's own financial system and capital controls remain significant obstacles to replacing the dollar. He further explores whether the world is entering a more fragmented, multi-currency era and what that could mean for trade, finance, and global power.
Paterson spoke about his findings with journalist Roseanne Gerin, an assistant editor at the newsletter Trade Strategies Today, who has worked in journalism for more than 25 years.
AFPC-USA is solely responsible for the content of this episode. The podcast transcript is available HERE.
Gerin asked Paterson to explain, in accessible terms, why the dollar's preeminent role matters so much for global trade, financial stability, and US geopolitical influence. Paterson began with the geopolitical dimension, arguing that the dollar's dominance has given Washington extraordinary leverage over the international financial system. Because so much global trade and investment is denominated in US dollars, banks worldwide rely on American-controlled financial infrastructure for "clearing, settlement, [and] messaging" and other essential functions. This has enabled the United States to "implement economic sanctions" by restricting countries' access to that infrastructure, effectively turning the dollar's dominance into a geopolitical tool. As a result, he warned that "the loss of dollar dominance would be a big blow to America's ability to instigate and implement economic statecraft."
Paterson then turned to financial stability, contending that the dollar's central role is closely tied to the credibility and actions of the Federal Reserve. Over the past four decades, he said, one defining feature of the international monetary system has been the Fed's willingness to "step in and take dramatic monetary action" during crises to safeguard global financial stability. He pointed to the Fed's interventions during the COVID-19 pandemic, the global financial crisis, and earlier emerging market crises as evidence of its stabilizing role. While acknowledging exceptions — particularly the early 1980s, when the Fed's fight against inflation conflicted with Latin America's need for lower interest rates — he concluded that the Fed has "broadly speaking ... been a responsible actor" in maintaining stability. On global trade, Paterson emphasized that the dollar serves as the world's common financial language. Without a dominant reserve currency, he explained, the existence of roughly 180 national currencies would create approximately "16,000 different cross-rates," making currency markets far more fragmented, volatile, and susceptible to manipulation. The dollar helps concentrate liquidity into a manageable number of exchange rates, while the deep and sophisticated US financial markets provide businesses with cost-effective hedging tools for both exchange rate and interest rate risks. Those mechanisms, he argued, allow exporters and importers to better match their revenues and costs, illustrating why the dollar standard has been "of great utility ... to the global trading system."
Stewart Paterson
Gerin referenced the paper's argument that hegemonic reserve currencies remain dominant when they preserve purchasing power, maintain their value relative to other currencies, and are backed by a country that produces goods the rest of the world wants. She asked how well the United States still measures up against those benchmarks. Paterson said the picture is increasingly mixed. On the one hand, he argued that the United States remains a global leader in several strategically important sectors, describing it as "a technological leader, if not the technological leader," with near-monopolistic positions in certain advanced technologies. He also highlighted America's strengths as a major exporter of fossil fuels and food and as a leader in weapons technology. These advantages, he said, still provide compelling reasons for other countries to hold dollar reserves for times of crisis. On the other hand, he argued that China's rise has fundamentally altered the balance. Although the United States excels in cutting-edge innovation, much of that production now depends on "Chinese input," including components and key manufacturing parts. Given China's dominance across a broad range of manufacturing industries — particularly advanced manufacturing — he suggested that it is "no longer really fair" to describe the United States as the world's dominant producer of goods and services. Instead, he argued that "that mantle has passed to China."
Turning to purchasing power, Paterson expressed concern about the Federal Reserve's inflation record. He noted that it had been "getting on for six years" since the Fed last achieved its inflation target, arguing that persistent inflation has been "eroding confidence in the US dollar." By contrast, he observed that inflation "has not been an issue in China," making the Chinese renminbi appear stronger "on that narrow measure." He went further by questioning whether the Fed still possesses both the capacity and the political mandate to return inflation to target. Bringing inflation fully under control, he argued, could require policies that would significantly slow economic growth, creating difficult tradeoffs unless external factors "do some of the heavy lifting." Paterson also addressed the dollar's relative value against other currencies. While acknowledging that the dollar has remained "very strong" and may be nearing the end of a roughly 12-year bull market, he emphasized that the more important question is its future trajectory. He foreshadowed later sections of the discussion by suggesting that several emerging forces could put downward pressure on the dollar, potentially triggering "a very sharp adjustment down in the value" of the currency and, with it, a broader "loss of confidence" in the dollar's long-term dominance.
Gerin turned to the first of the paper's three major pressures on the US dollar — its economic foundations. She noted that the report identifies persistent inflation, America's deeply negative net international investment position (NIIP), and the country's shrinking share of global output as key vulnerabilities. Paterson replied that the three forces "act in unison" and reinforce one another, making it difficult to isolate a single factor. If forced to choose, however, he said he would point to the net international investment position as the greatest concern. He explained that the NIIP represents the gap between Americans' ownership of foreign assets and foreigners' ownership of US assets. Because the United States runs persistent current account deficits, it relies on foreign capital to finance them, resulting in foreigners owning roughly US$70 trillion in US assets—about US$28 trillion more than Americans own abroad. That imbalance, he argued, has pushed America's NIIP to roughly 90% of GDP, a level he described as "off the charts relative to anything we've seen in history." The danger is that if foreign investors begin to doubt the future real returns on US assets, they could become "net sellers." Given the enormous stock of foreign-owned assets, he warned that such a shift could unleash "a lot of dollar selling," with potential balance-sheet adjustments that would "dwarf the flows" associated with normal current account financing.
Paterson said inflation is one reason such a loss of confidence could occur, since foreign investors are ultimately concerned with preserving their purchasing power. He also highlighted a second structural trend: as global trade becomes increasingly centered on China, foreign central banks may gradually rebalance their reserve holdings away from dollars and toward the Chinese renminbi. Although foreign exchange reserves account for only about 20% of foreign US asset holdings, he said even incremental shifts by central banks could have meaningful consequences over time. Taken together, he concluded, the three economic pressures "feed off each other," and the "economic fundamentals underpinning US dollar dominance have significantly deteriorated in the last 15 years or so."
Gerin then turned to the role of domestic economic policy, citing the paper's estimate that the Trump administration's tariff regime had added roughly 0.8 percentage points to inflation over the previous 15 months, while increased defense spending had raised broader questions about fiscal discipline. She asked how persistent inflation — and the perception of political interference in the Federal Reserve — might affect global confidence in the dollar. Paterson argued that sustained inflation unquestionably undermines confidence in the currency. He reiterated that it had been "six and a half years since the Fed met its inflation target," acknowledging that much of the initial surge resulted from the extraordinary fiscal and monetary response to the COVID-19 pandemic. Even so, he maintained that the Fed had since had "plenty of time" to restore price stability and that its failure to do so represented "a black mark against the dollar." He largely separated that criticism from President Trump's role, saying the inflation problem "has little to do with Trump," though he acknowledged that Trump's public calls for lower interest rates — his "verbal interference in monetary policy" — had "not been helpful."
On the broader question of central bank independence, Paterson offered what he described as "probably an unorthodox position." While the traditional argument is that independent central banks deliver better inflation outcomes because they are insulated from electoral politics, he questioned whether recent history supports that assumption. Independent central banks around the world, he argued, "have frankly made a mess of inflation management" over the past several years. Although the theoretical case for independence "makes perfectly logical sense," the experience of the last five or six years has shown that even independent central banks are forced to respond to extraordinary crises in ways that lead them to "breach their inflation mandates." Consequently, he suggested that the belief that central bank independence is inherently "a guarantor of price stability" has become "slightly overhyped."
Gerin shifted the conversation from economic pressures to the geopolitical dimension of the paper, noting its finding that more than 70 countries have faced US sanctions in some form. She highlighted the paper's argument that there is an "irreconcilable tension" between promoting the US dollar as the world's reserve currency while simultaneously weaponizing it through sanctions. She asked Paterson whether the international system had reached a tipping point where countries are now actively seeking to hedge against the dollar. Paterson replied that, at least in China's case, "we've reached that point a while ago." He argued that China is uniquely positioned to challenge the dollar because it possesses both the economic scale and the global influence needed to build an alternative financial infrastructure. He likened reserve currencies to network effects, explaining that dominant systems appear nearly monopolistic until competitors gradually "chip away at the edges," eventually reaching a moment when "all of a sudden there is an alternative network." He suggested that the world is approaching precisely that moment, where countries may soon recognize that there is "a perfectly functioning non-dollar cross-border settlement and payment system" that can operate independently of both the US dollar and American financial infrastructure. Although he acknowledged that China's alternative system remains far from dominant, he argued that US sanctions have already become less effective because countries such as North Korea and Iran have increasingly relied on these parallel financial channels. For that reason, he concluded that "yes, we are kind of at that tipping point." Looking ahead, Paterson said the critical question is not how sanctioned states behave, but how mainstream economies that have never faced US sanctions respond. Over the next decade, he argued, governments and businesses will have to decide whether the commercial advantages of "having a foot in each camp" outweigh the geopolitical risks of remaining entirely within the dollar-based financial system. In his view, that gradual diversification will determine whether the alternative networks achieve broad acceptance.
Turning to technology, Gerin asked about the paper's discussion of central bank digital currencies (CBDCs), instant payment systems, and platforms such as mBridge, which enable cross-border settlements without relying on the US dollar. She wanted to know how quickly these technologies could begin reducing dependence on the dollar and which innovations posed the greatest long-term disruption. Paterson compared the transition to the old saying that people "go bankrupt slowly, slowly, and then very suddenly." He argued that competing payment systems are likely to gain market share only incrementally at first before reaching critical mass, after which adoption could accelerate rapidly. Among the emerging technologies, he singled out instantaneous cross-border settlement using central bank digital currencies as the most transformative. While geopolitical considerations matter, he stressed that the stronger force is likely to be simple commercial efficiency. If an international payment network proves "faster," "cheaper," and reduces the likelihood of errors, businesses will adopt it regardless of politics. In that sense, he described technology as "the key" to reshaping the international payments landscape.
Paterson pointed specifically to China's progress with mBridge, noting that although the platform currently involves only a relatively small group of central banks, its success could change rapidly if it demonstrates that it can operate at scale with low costs and high efficiency. Should that happen, he predicted, it would "garner a lot of favor very quickly." Gerin then shifted to China's broader strategy of internationalizing the renminbi. Referencing Xi Jinping's call for China to become "a strong financial nation" whose currency is widely used in global trade and reserves, she asked what had changed in Beijing's political thinking to elevate RMB internationalization as a national priority. Paterson argued that the answer is rooted primarily in geopolitics. China, he said, has closely observed the consequences of US financial sanctions and concluded that excessive dependence on the dollar leaves countries vulnerable to American pressure. While he cited Iran as a clear example of a country heavily affected by sanctions, he reiterated that roughly 70 countries have experienced some form of US economic sanctions.
Paterson identified Russia's invasion of Ukraine as the event that significantly accelerated Beijing's thinking. According to Paterson, the sweeping sanctions imposed on Russia reinforced China's determination to reduce its own vulnerability by expanding the international role of the RMB and developing payment infrastructure outside US control. At a minimum, he argued, Beijing's objective is to ensure it has the maximum freedom of action to pursue its diplomatic and geopolitical goals "without fear of economic sanction from the United States." Achieving that requires not only greater international use of the RMB, but also a cross-border payment system that China controls itself. In Paterson's view, that strategic autonomy is "the key issue that President Xi Jinping has in mind" as China pushes to build an alternative global financial architecture.
Continuing the discussion of China's ambitions for the renminbi, Gerin turned to Paterson’s argument that China's closed capital account remains a fundamental obstacle to the RMB becoming a true global reserve currency. She asked Paterson which challenge is most difficult for Beijing to overcome — the capital controls themselves, weak investment returns, or vulnerabilities within the banking system. Paterson replied that the three problems are deeply interconnected, with "the causation" running between all of them. He explained that capital controls have effectively trapped China's enormous domestic savings pool inside the country. Those captive savings have fueled excessive investment, leading to weak financial returns, which in turn have weighed heavily on the banking sector through non-performing loans and compressed lending margins.
At the same time, he noted, the banking system benefits from the very restrictions that create those distortions. Because Chinese savers have "few alternatives" and their money is effectively trapped, banks can maintain low deposit rates, which further reinforces the cycle of overinvestment. In other words, each problem both causes and perpetuates the others. Ultimately, however, Paterson argued that capital controls are the single biggest obstacle to China's reserve currency ambitions. For the RMB to become a genuinely global reserve currency, foreign investors must be confident they can freely buy and sell RMB-denominated assets, convert the proceeds into other currencies whenever they choose, and earn competitive returns on those investments. That objective, he argued, clashes directly with the structure of China's political economy. The Chinese Communist Party manages economic planning largely through its control over capital allocation, meaning that opening the capital account would weaken one of its primary policy tools. This creates what he described as "the huge tension" between maintaining political control and promoting the RMB internationally.
Rather than fully liberalizing financial markets, Paterson suggested that Beijing is more likely to pursue a tiered system of market access designed around its own priorities. Under such an approach, certain foreign investors — particularly official holders of RMB assets, such as central banks — might receive preferential treatment, including greater liquidity or more favorable access than private investors. He characterized this as "a typical sort of Marxist-Leninist approach to solving a market problem," in which policymakers attempt to suppress market forces rather than fully embrace them. Nevertheless, he concluded that Beijing's "unwillingness to free the capital account is the biggest barrier" standing in the way of the RMB achieving reserve currency status.
Gerin then asked about two examples highlighted in the report — Kenya's decision to redenominate one of its loans into RMB and BHP Group's move to settle some iron ore sales in RMB. She wondered whether these were merely symbolic gestures or evidence of a more meaningful shift in the way major economies are beginning to transact with China. Paterson said that the developments are "emblematic of a trend that is starting to play out," even though they represent very different types of transactions. Discussing Kenya, he explained that the move was driven by straightforward commercial considerations. Because RMB interest rates are now significantly lower than US dollar rates — a consequence of China's low inflation, weak investment returns, and captive domestic savings — Kenya stands to reduce its borrowing costs. While the country assumes the risk that the RMB could appreciate, that risk is partially offset if a growing share of Kenya's exports to China is paid for in RMB, allowing it to naturally match export revenues against its RMB-denominated debt obligations.
Turning to BHP, Paterson said China's position as the world's largest importer of iron ore and numerous other commodities gives it enormous leverage as what he called an almost "monopolistic buyer." China's challenge, however, is not demand but the lack of depth and liquidity in RMB-denominated commodity markets. He described the situation as a classic "chicken-and-egg" problem. Beijing is attempting to engineer liquidity in RMB commodity markets on the assumption that once sufficient trading activity develops, "liquidity will breed liquidity." Achieving that goal, however, requires far more sophisticated financial infrastructure, including liquid derivatives markets that allow companies such as BHP to hedge exchange-rate exposure and commodity-price risk in RMB. For example, BHP would need efficient forward markets that allow it to hedge the gap between its Australian dollar or US dollar operating costs and its RMB-denominated revenues. While China is actively building that infrastructure, Paterson stressed that the effort remains in its early stages. For now, he concluded, Beijing is still relying on "a certain amount of arm-twisting and coercion" to encourage companies to adopt RMB settlement. Over the longer term, however, China's objective is to create sufficiently deep and efficient financial markets that businesses will choose to transact in RMB voluntarily because it makes commercial sense, rather than because they are pressured to do so.
Gerin noted that the paper had been published in April and that several major geopolitical and economic developments had occurred since then. She asked Paterson whether changes in US inflation, the conflict involving Iran, or recent tariff policies had altered his assessment of the dollar's long-term outlook. Paterson explained that higher oil prices typically provide short-term support for the US dollar because oil remains overwhelmingly priced and traded in dollars, increasing global transaction demand for the currency. He also noted that the Trump administration's emphasis on expanding domestic hydrocarbon production had left the United States "relatively unscathed" from a balance-of-payments perspective despite the energy shock. He acknowledged that inflation had "ticked up" because of the cost-push inflation associated with the Iran conflict, but argued that the more consequential development was geopolitical rather than economic. In his view, the United States' decision to act in the Gulf independently of its European allies and much of its broader alliance network created the impression of growing diplomatic isolation. He contrasted that with China's position, arguing that Beijing entered the conflict "incredibly well-prepared," particularly because it had built up substantial energy inventories beforehand. Taken together, he said, these developments had produced "an isolationary effect on the United States," leaving it looking "pretty lonely on the international diplomatic playing field." As a result, he suggested that recent events may actually accelerate the long-term erosion of the dollar's hegemonic status, even if they temporarily strengthened the currency through higher oil prices.
Gerin asked whether Beijing had made any meaningful progress toward the reforms discussed in the report, particularly regarding capital account liberalization, banking-sector reform, or the expanded use of the digital renminbi. Paterson replied that the evidence pointed to "quite the opposite." Rather than loosening restrictions, he said China has tightened capital controls, describing what he called "the biggest clampdown on illicit overseas capital flight from China in several decades." As evidence, he pointed to enforcement actions against several Hong Kong brokerages, arguing that the stricter controls directly undermine Beijing's long-term goal of RMB internationalization.
On a more positive note, however, he said China has continued making progress on mBridge, the cross-border payment platform that he believes could become a "big breakthrough" if it proves scalable. Regarding the financial system more broadly, Paterson saw little evidence of meaningful banking-sector reform. If anything, he argued, the continued weakness of the Chinese economy has made reform even less likely because policymakers are increasingly dependent on keeping domestic savings inside the banking system. Allowing capital to flow more freely would raise banks' funding costs at precisely the moment when the sector is under pressure from broader economic weakness and financial stress. Ironically, Paterson suggested that these domestic constraints are currently supporting the dollar's dominance. He described a fundamental tension between China's ambition to internationalize the RMB and the reality that its "fragile banking sector" still depends on capital controls and policies designed to prevent capital flight. Until Beijing resolves that contradiction, he implied, the dollar retains an important structural advantage.
When Gerin asked which indicators foreign correspondents should monitor over the next 12 to 18 months to determine whether the world is genuinely moving toward a multi-currency financial system, Paterson said one of the clearest signals would come from countries that currently peg their currencies to the US dollar or closely shadow its value, particularly governments whose geopolitical relationships with Washington have become more strained. He singled out Saudi Arabia as a key example. As long as a country maintains a dollar peg, he explained, it must continue holding substantial US dollar reserves, which naturally encourages trade to remain dollar-denominated. Even if some transactions are settled in RMB, those proceeds would likely be converted back into dollars almost immediately to maintain reserve requirements. For that reason, he argued that changes to exchange-rate regimes among these countries would represent one of the strongest indicators that the dollar's dominance is beginning to weaken. The second major development to watch, he said, is the commercialization of alternative payment systems such as mBridge. If those platforms prove significantly cheaper, faster, and more efficient than the traditional US-centered correspondent banking system, they could begin attracting widespread commercial adoption regardless of geopolitical considerations.
