Donald Trump’s reversal over the Greenland issue might have arrived too late to mend the widening global disillusionment with the U.S. dollar. Nations like China, along with other holders of U.S. currency reserves, are continuing to either shed or reduce their reliance on the greenback.

Since the ‘Nixon shock’ of 1971, which detached the dollar from gold backing, the United States has enjoyed the rare advantage of having its currency serve as the world’s primary reserve. This status has allowed the U.S. to maintain large budget deficits and accumulate significant debt without much concern, as countries from China to Germany have been content to stockpile U.S. dollar securities or bonds, commonly referred to as U.S. Treasuries, in their official reserves.

These U.S. bonds have long served as a crucial capital layer for the world’s major banks and have been perceived as a secure refuge for fund managers. However, this sanctuary is now under threat. President Trump’s trade skirmishes, which have targeted allies and adversaries alike, along with his persistent critiques of the Federal Reserve’s independence and unpredictable national security strategies, have left governments and traders feeling uneasy.

The fallout from these actions is evident as the dollar tumbles in foreign exchange markets. During the first half of last year, the dollar depreciated by 15% in reaction to the President’s ‘Liberation Day’ tariffs.

Although Trump eventually reconsidered his tariff strategy, leading some in financial circles to coin the term ‘TACO’—Trump Always Chickens Out—to describe his pattern of retreating from threats, the damage to the dollar’s standing has already been done.

He did eventually reconsider the policy – leading some on Wall Street to adopt the phrase ‘TACO’, or Trump always chickens out, to describe his tendency to back down on his threats.

But the past 12 months have not been kind to the dollar, as it fell 11.5 per cent against the euro and 10 per cent against sterling.

And the yield on 30-year US bonds is now 0.35 of a percentage point higher than when Trump secured his second election victory in November 2024, with the higher cost paid by the US to borrow money reflecting growing distrust among global markets about America’s ability to pay its debts.

Donald Trump at the World Economic Forum in Davos, Switzerland last week

It might have been expected to move in the opposite direction given the Federal Reserve has cut its key interest rate three times since Trump took the oath of office.

Meanwhile, European disenchantment with American assets has been fuelled somewhat ironically by Deutsche Bank, which for many decades was Donald Trump’s go-to bank for his US property operations.

In a recently published note, the bank’s foreign exchange strategist highlighted that Europe holds $8 trillion (£6 trillion) of US bonds and equities. So while America may have the military might, Europe could turn the tables as the biggest lender to the US.

It prompted a fierce response from US Treasury secretary Scott Bessent, who claimed that Deutsche Bank had called him to disavow the note.

Bessent is best known in Britain as the trader, working for George Soros, who bet against the Bank of England in 1992 – when the pound was ejected from the Exchange Rate Mechanism – draining the UK’s currency reserves.

As a result, he knows more than most about how easily the tide can turn against a currency.

US Treasury data shows that European states hold far greater amounts of American debt than China, giving them a ‘big bazooka’ to fire in the event of a breakdown in transatlantic relations.

Some European investors, notably Denmark’s largest pension fund PFA, have also cut their dollar exposure. PFA argued this was a normal part of risk management. But it is hard to believe America’s designs on the Danish territory of Greenland were not on the agenda.

The UK, Belgium, Luxembourg, France, Ireland and Norway collectively hold $2.84 trillion in US Treasuries, equivalent to 30 per cent of the whole market. Trump may be contemptuous of Europe’s contribution to Nato, but the President treads on thin ice when he threatens economic warfare.

Disaffection with the dollar has also spread beyond the Continent.

For several decades, as it deepened its domination of world trade, China’s chosen currency for its reserves was the greenback.

US Treasury secretary Scott Bessent speaks with President Trump. Bessent knows more than most about how easily the tide can turn against a currency – he is is best known in Britain as the trader who bet against the Bank of England in 1992, draining the UK’s currency reserves

It was an obvious choice because of its liquidity and the commercial reality that almost all global commodities, including oil and gas, are priced in the dollars.

It also commands a high level of trust as – in times of financial stress such as the Great Financial Crisis of 2008 – the Federal Reserve is expected to stand behind the currency.

But Trump’s tariff war with Beijing and frayed diplomatic relations have fractured that confidence. Precise holdings of US dollars by Chinese banks and funds are not easy to obtain. However, changes in the holdings of official reserves are pronounced.

Reports suggest China has dumped 40 per cent of its dollar assets since Trump arrived in the White House last January, reducing them to a modest $682.6 billion.

Instead, China is now the driving force behind a global gold rush, converting dollars into bullion for 14 months in a row, helping to drive the price up 63 per cent over the past year.

Global liquidity, the ability of world trade to function, demands the dollar remain the world’s preferred reserve currency. There is just not enough gold to fill the gap.

The baleful experience of the ‘gold standard’, when a currency’s value was fixed to a specific amount of gold, constricting international output in the 1920s and 1930s, ultimately leading to the Great Depression and is also deeply embedded in global economic folklore.

Despite this, the dollar is not invulnerable – and an eccentric and increasingly authoritarian US President may be inadvertently sowing the seeds of its destruction.

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