TOKYO – The latest eulogy for the US dollar writes itself. As Donald Trump’s White House decouples the US from a global trade system it dominates, the dollar is taking the brunt of the fallout.

This has many global investors writing the reserve currency’s obituary. There’s a sense, indeed, that the four most dangerous words in economics – this time is different – might apply as the Trump 2.0 presidency digs in against financial gravity.

The US president has made no mystery of his disdain for an independent central bank, basic transparency or pesky norms like not defaulting on government debt. The question, though, is less whether the dollar’s days as the premier safe haven are over. It’s what events or news items investors should be watching that might tank the dollar to new depths.

They include Trump’s dynamic with the Federal Reserve, the fate of Treasury Secretary Scott Bessent, whether the trade war intensifies and how US-China tensions shake out.

So far, scary as it’s been, the dollar’s roughly 10% decline year to date has been reasonably orderly. It has stabilized in recent trading sessions as Trump appeared to throttle back on his tariff arms race. The damage to the dollar is likely done, though.

“The US dollar weakness is here to stay,” says Kamakshya Trivedi, head of foreign exchange at Goldman Sachs. “It’s going to persist, and it’s going to deepen. I think the dollar weakness has further to run.”

Jonas Goltermann, economist at Capital Economics, says Trump’s tariff gamble has resulted in “what looks increasingly like a generalized loss of confidence in the US as a safe haven in currency and bond markets.”

In a recent speech at a private event in Abu Dhabi, Bloomberg quoted Paul Singer, founder of Elliott Investment Management, as warning that the dollar might lose its reserve currency status thanks to surging trade tensions.

Yet others argue the dollar’s declines aren’t as worrisome as many think. Samuel Zief, head of global FX strategy at JP Morgan Private Bank, notes that the dollar’s “longstanding overvaluation is beginning to unwind, which could result in a 10%–20% decline against major peers such as the euro and Japanese yen over the medium term. We don’t see this as a breakdown in the dollar, but it is a reset.”

Zief adds that “we don’t think investors need to overhaul their asset allocations, and the United States remains a valuable core holding. But recent market action reminds us that over-reliance on any single market carries risks. In a shifting environment, intentional diversification across regions and currencies is crucial.”

Trivedi is paying particular attention to the ways in which the BRICS — Brazil, Russia, India, China, South Africa — and other Global South nations are diversifying away from the dollar. In the short run, Trivedi notes, “it’s going to be the euro or the yen in the lead. That’s your typical ultra-safe haven.”

On the yen, Trivedi adds, “I think that we could be getting back to the low 130s in quick time if the labor market data in the US start to crack.” That would be a startling move considering dollar-yen is at 142 now.

One risk factor is what all this means for the so-called “yen-carry trade.” Twenty-six years of zero rates turned Japan into the premier creditor nation.

Over time, investors got into the habit of borrowing cheaply in yen to fund bets on higher-yielding assets everywhere. This strategy has kept aloft everything from Argentine debt to South African commodities to Indian real estate to the New Zealand dollar to derivatives on New York exchanges to cryptocurrencies.

The yen’s recent surge could pull the floor out from under markets around the globe. When the yen zigs sharply, markets have long tended to zag. That’s why the BOJ’s move on July 31, 2024 to raise rates to the highest level since 2008 shook world markets. It happened in January, when the BOJ hiked rates a second time – to 0.5%.

Arif Husain, head of fixed income at T Rowe Price, speaks for many when he calls the yen-carry trade the “San Andreas fault of finance.” Yet the real wildcard for foreign exchange markets is where the Trump White House takes US policy next.

Case in point: what becomes of the target Trump put on Fed Chair Jerome Powell’s back? Unhappy that Powell warned US tariffs might cause stagnation, Trump posted on social media that the Fed leader’s “termination cannot come fast enough.”

Trump’s threats to fire Powell sent shockwaves through world markets. Though US leaders in the past jawboned Fed policymakers at times to lower rates, none had ever publicly demanded subservience. A simultaneous plunge in stocks and bond prices had Trump toning down his rhetoric.

Yet Evercore ISI economist Krishna Guha calls the episode “self-defeating.” By publicly undermining Powell, Guha says, Trump “risks putting upward pressure on inflation expectations, making it harder for the Fed to cut rates.”

Even so, few buy Trump’s insistence last week that he has “no intention of firing” Powell. In the next breath, after all, Trump said he wants the Powell Fed to a “little more active” in easing policy.

As Linh Tran, analyst at broker XS.com, points out, the dollar is being governed by “three core drivers” at the moment: a belief the Fed will soon shift toward easing, uncertainty over US-China trade tensions and geopolitical risks “especially as peace efforts between Russia and Ukraine remain stalled.”

The spoiler could be Trump ratcheting up tensions againg with Powell. Or Bessent, who’s been cast in the role of “good cop” to Peter Navarro’s “bad cop” as Washington mixes it up with Beijing. Trade advisor Navarro, who co-wrote a book titled “Death By China”, has been agitating for a bigger trade war and a firmer stance toward the Fed.

Bessent, who’s considered less MAGA-ish than all other Trump cabinet picks, has been a relative voice of reason and calm on tariffs. As the Wall Street Journal reported earlier this month, it was Bessent who talked Trump back from the brink — for now.

Many fear, though, that the Navarro camp will reassert itself. News reports on how Trump “blinked” or “caved” on tariffs probably aren’t going down well in Trump World. The same goes for Trump being caught in an apparent lie about whether the US is now negotiating with China on trade. Trump claims yes; Beijing says no.

Bessent has been caught in the middle in ways that could make the former hedge fund manager’s ability to stay in MAGA World difficult. It was Bessent who had to do cleanup on Trump’s claims that Xi Jinping and his top negotiators call him often.

China has claimed no calls were made. Bessent was also sent out to attempt to explain what Trump really meant when he claimed, “I’ve made 200 deals” with American trading partners.

The Treasury chief is also the point man on keeping the bond market from cracking again. Earlier this month, Bessent helped Trump dodge a disaster as the so-called “bond vigilantes” rebelled against tariffs, which seemed sure to push the US toward stagflation. The debt market chaos raised questions about whether Asian central banks might dump their US Treasuries.

“Japan and China, two of the largest holders of [Treasuries], have been scaling back their demand in recent years,” says Meghan Swiber, US rates director at Bank of America. “Tariffs and the prospect of a shrinking US trade deficit may mount foreign selling pressures, medium term. However, foreign investors are unlikely the only seller driving recent price action.”

A big challenge for Bessent to finesse is Trump’s focus on tax cuts at a moment when the US national debt is approaching US$37 trillion. The ways in which the $140 trillion global bond market literally screamed at Trump’s chaos in Washington suggest Bessent’s team won’t necessarily enjoy the benefit of the doubt with traders.

The same goes for Washington’s fiscal trajectory. Though US ratings agencies have been eerily quiet, European credit ratings agency Scope is ringing the alarm. Alvise Lennkh-Yunus, Scope’s head of sovereign ratings, warns that Trump’s tariffs may lead to a critical mass of global investors pivoting to “viable alternatives” to the dollar as the dominant currency.

“If doubts about the exceptional status of the dollar were to increase, this would be very credit negative for the US,” Lennkh-Yunus says.

At the moment, Berlin-based Scope rates Washington AA with a “negative” outlook, lower than the AA+ scores of S&P Global and Fitch Ratings and well below the AAA that Moody’s Investors Service still assigns the US.

Doubts about the dollar’s status could increase suddenly if China and the European Union deepen their trade ties, Lennkh-Yunus says. The same could happen if Xi accelerates steps to reform and open China’s economy. Another big risk: if countries with large trade surpluses and financial exposure to the US grow tired once and for all of Trump’s antics.

Even so, it’s hard to see a ready replacement. Gold’s rally to all-time highs is demonstration enough that neither the euro nor the yen nor the Chinese yuan is ready to hoover up trillions of global capital desperate for a new home.

“Our bottom line remains that there is no viable alternative to the dollar’s global dominance for the foreseeable future, but that Trump’s actions may accelerate a secular decline over time in dollar dominance and in the process exacerbate financial market volatility,” says Steven Kamin, a senior fellow at the American Enterprise Institute, a Washington-based think tank.

In his previous work with Mark Sobel, US chair of the Official Monetary and Financial Institutions Forum (OMFIF), Kamin highlighted three key considerations with respect to upholding future dollar dominance: preserving the underpinnings of the dollar’s global role; maintaining trust in the US as a reliable partner; and avoiding overuse or abuse of financial sanctions.

“Trump is weakening many properties that underpin dollar dominance,” Kamin explains. “America’s fiscal trajectory is already unsustainable, and yet Trump plans to cut taxes.”

Trouble is, he notes, “already excessive debt and deficits are well poised to go higher. Team Trump has alluded to levies on capital inflow or taxes on those who might shun the dollar.”

China, meanwhile, has shown no urgency to sit at Trump’s negotiating table, despite Trump’s assertions to the contrary. As Guo Jiakun, Chinese Ministry of Foreign Affairs spokesman, told reporters: “I want to reiterate that China and the United States are not engaged in consultations or negotiations on the tariff issue.”

What only Trump – and perhaps Navarro – can say is whether a “grand bargain” trade deal with Beijing is still in the realm of possibility. In the interim, Trump is taking a fake-it-until-you-make-it approach to trade deals with Japan and South Korea. Tokyo and Seoul are also saying no deals are imminent, despite contrary suggestions from Trump World.

But as Trump chips away at all the reasons why the dollar remains at the center of the global financial universe, its safe haven status is now very much at risk. Though there’s a lack of ready alternatives, Trump is giving global investors new incentives to find them, and sooner rather than later.

Follow William Pesek on X at @WilliamPesek