Dollar Wavers Amid 'Triple Crisis' Fears... Yuan and Euro Seize the Opportunity

Large-Scale Treasury Issuance Expected if Tax Cuts Pass
Concerns Over Decline in Dollar Assets... U.S. Treasury Yields Rise
Skepticism Over Scenarios Predicting Dollar's Collapse

As concerns mount over the U.S. fiscal deficit and national debt, the dollar's status as the world's reserve currency is showing signs of instability, creating an opening for the yuan and the euro. If capital continues to flow out of dollar-denominated assets, leading to a so-called "triple crisis" in which stocks, bonds, and the dollar all decline simultaneously, the yuan and the euro could emerge as alternative reserve currencies. Seizing on the weakening of dollar hegemony, China is intensifying efforts to internationalize the yuan. However, many analysts still believe that scenarios predicting the collapse of the dollar are exaggerated and that the dollar's dominance will persist for the foreseeable future.

Trump's Tariff War Drives Down Dollar Index... Massive Tax Cuts Further Undermine Dollar's Status

According to the South China Morning Post (SCMP), after U.S. President Donald Trump announced reciprocal tariffs, the dollar index?which measures the value of the U.S. dollar against six major currencies?slipped from 103.66 on April 2 to as low as 99.31 on May 27, a decline of 4.2% over this period. In contrast, on May 27, the People's Bank of China set the yuan's central parity rate at 7.1876 per dollar. On the same day, the offshore yuan traded at 7.191 per dollar, having reached as high as 7.162 per dollar the previous day, marking a six-month high.

The dollar's status is being shaken primarily due to concerns over the U.S. fiscal deficit and national debt. President Trump's tariff policies have heightened economic uncertainty, and the massive tax cut bill recently passed by the House of Representatives (described as "one big, beautiful bill") has exacerbated these concerns. This bill, spanning over 1,000 pages, includes large-scale tax cuts and increased spending, raising the federal debt ceiling to $4 trillion. According to the Penn Wharton Budget Model, the bill is projected to increase the U.S. baseline fiscal deficit (excluding interest payments) by $2.8 trillion over the next decade.

Ding Shuang, chief economist at Standard Chartered Bank, stated, "The fundamental reason for the dollar's decline is doubt over whether U.S. assets remain safe," adding, "A combination of factors is at play, including U.S. economic policy, the downgrade of the national credit rating, and expansionary fiscal policy."

As of May 23, the U.S. national debt stood at $36.2 trillion, and interest payments alone last year are estimated to have exceeded $1 trillion. Citigroup projects that by the end of this fiscal year (October), the U.S. government will face interest costs totaling $1.2 trillion.

China International Capital Corporation (CICC) expects the U.S. to issue a large volume of Treasury bonds in the near future, estimating net issuance between July and September could reach $1.25 trillion. As a result, there is a risk of a sharp tightening in dollar liquidity, which could push the yield on 10-year U.S. Treasury bonds from 4.8% to above 5%.

CICC warned, "As U.S. Treasury issuance increases, market volatility will rise, and a 'triple crisis'?a simultaneous decline in stocks, bonds, and the dollar?could occur as capital flows out of dollar assets."

As Dollar Hegemony Wavers... Central Banks Move to Strengthen Their Own Currencies

With dollar hegemony showing signs of weakness, central banks around the world are moving to strengthen their own currencies' positions. Christine Lagarde, President of the European Central Bank (ECB), said in a speech in Berlin, Germany, on May 26, "There is an opportunity to create a global moment for the euro," and described it as "a chance for Europe to take greater control of its own destiny."

The People's Bank of China recently instructed major domestic banks to increase the proportion of yuan used in international trade transactions. According to Bloomberg, the central bank raised the minimum ratio of yuan-denominated trade transactions from 25% to 40%. The People's Bank of China previously announced that, as of January, the yuan's share of goods trade settlements had reached 30%. The goal is to push this proportion even higher.

Despite these efforts, the dollar still overwhelmingly dominates global foreign exchange reserves. As of the end of the fourth quarter last year, the dollar accounted for 58% of global foreign reserves, far ahead of the euro's 20% share. However, over a longer period, the dollar's share of global reserves has declined from 70% in 2000 to 58% today. The Washington Post (WP) noted, "This shows the weakening of the dollar's status."

Despite the yuan's challenge, dollar hegemony is expected to continue for the time being. Martin Wolf, deputy editor of the Financial Times (FT), stated, "The yuan may be a suitable settlement currency for trade with China, but China maintains capital controls and an illiquid domestic financial market," adding, "China does not provide the highly liquid and safe assets that the U.S. has traditionally offered."

James Lord, head of emerging markets FX strategy at Morgan Stanley, also commented, "Predictions of the dollar's demise may be greatly exaggerated," adding, "Its dominance as a reserve currency will remain strong. The dollar continues to be the preferred choice for central bank allocations, global trade finance, foreign exchange transactions, cross-border lending, and bond issuance."

He predicted that as China expands its economic and financial influence globally, the yuan's share of global foreign reserves and trade could rise by about 2.3% by 2030. However, he emphasized that this would not be enough to threaten the dollar's dominance for at least the next ten years.