The dollar is in trouble. This fact is becoming harder to ignore. Last week, President Trump threatened to impose additional tariffs on the BRICS alliance, which includes China, Russia, and India, if they moved forward with their plans to launch a new currency. But it isn’t clear if the president is training his fire in the right direction. In mid-June, European Central Bank President Christine Lagarde declared that “the dominant role of the US dollar… is no longer certain” and that it was time to launch the euro as a truly global currency.
“Since the beginning of 2025 the dollar has had its worst year since 1986.”
The ECB is only catching up with trends that are already ascendant in markets. For months now, financial markets have been engaged in what is called “Reverse Yankee” lending, in which bonds are issued by American companies in euros rather than in dollars. Large US corporations are switching their borrowing from dollars into euros in large part because American interest rates are so high: The 10-year yield on a US Treasury bond is currently at 4.41 percent, while the interest rate on a 10-year German bond is only 2.69 percent.
Dollar hegemony rests on a few key pillars, but one of them is low interest rates. The US dollar has maintained dominance partly through the capacity for foreigners to borrow at low interest rates by issuing debt in US dollars. Clearly, that is no longer the case.
President Trump is pushing the Federal Reserve to lower interest rates, but even if he manages to do so this will likely prove a temporary victory. Higher tariffs and lower immigration are a recipe for higher inflation—and hence, higher interest rates. The markets know this, so the 10-year Treasury yield will likely not respond much to the Fed lowering rates.
Meanwhile, the dollar is falling—and falling fast. Since the beginning of 2025 the dollar has had its worst year since 1986, having fallen nearly 11 percent. But the comparison is misleading, because 1986 was the year of the Plaza Accords, an agreement between the Reagan administration and America’s allies to force a decline in the US dollar. That is, in 1986 the decline was the consequence of an official government policy. In 2025, according to officials, it is not.
Why is the dollar in such rapid decline? The present trouble goes back to 2022, when the Biden administration seized Russian foreign-exchange reserves as part of the sanctions put in place against the country after the invasion of Ukraine. Soon after this happened, Russian president Vladimir Putin gave a speech in which he warned that the “illegitimate freezing of some of the currency reserves of the Bank of Russia marks the end of the reliability of so-called first-class assets.” Putin’s words proved prescient. In the subsequent years, as central banks all over the world started buying up enormous quantities of gold. The price of gold now stands at $3,335, a level most analysts would have never thought possible only a few years ago.
Markets paid attention to these shifts, but they were not enough to move them against the US dollar. That move started in early April when President Trump made his Liberation Day announcement of a new tariff program in which the United States would impose substantial tariffs on all its major trade partners. Since the announcement, the administration has introduced a series of delays to give its partners time to cut a deal. But the overall message is clear: The United States will no longer be open for business in the way that it was previously.
It is this announcement that has led to markets turning against the dollar. Every week there is a new announcement of countries experimenting with new types of trade settlement or entering into trade agreements that would have been unthinkable a few years ago. Among the most shocking recent developments have been reports that exporters are now refusing to take dollars in exchange for their products. Until recently, dollars would be accepted worldwide to settle almost any transaction. Today they are like a hot potato: No one wants to hold them.
Given these developments, Washington is faced with a choice: Either it can accept that dollar hegemony is finished and radically change its approach to global monetary matters, or it can allow the collapse of dollar hegemony to take place via market pressures. This is another way of saying that the Trump administration can either oversee a managed decline of dollar hegemony, or it can allow dollar hegemony to unwind chaotically.
It is strongly in the interest of both the United States and the world to have an orderly transition away from the dollar. The Hungarian Institute of International Affairs, where I am a senior research fellow, has tabled a proposal for a new Bretton Woods conference that would restructure the global monetary architecture in an orderly manner, just as was done at the original Bretton Woods conference in 1944. The original Bretton Woods system gave us decades of global economic stability and prosperity, and a new Bretton Woods system could do the same.
Unlike the original Bretton Woods system, which was centred on the US dollar, the new system would be truly multilateral. It would be based on the “bancor,” a sort of virtual international currency that would be used to clear trade between countries. Bancors would never exist in the sense of a normal currency—no one would use them for day-to-day transactions and there would be no physical notes—but every time one country traded with another, the settlements would be done in bancor rather than in national currencies.
Crucially, the bancor would have firm rules built into the system that would penalize countries if they ran too large trade surpluses or too large trade deficits. These rules would force countries that are running imbalanced trade to adjust their economies to stop this from happening. The bancor system would thereby help achieve the MAGA goal of rebalancing trade and bringing manufacturing back to the United States. It is a far more promising and far less chaotic way to do this than the current tariff policies.
The United States is now at a crucial point in its history. For years it has relied on dollar hegemony to run massive trade deficits, which contributed to the hollowing out of American manufacturing. This system is now dead, and the only question is what should replace it. Either the Trump administration can grab the bull by the horns and work with other countries to create a new stable, sustainable global monetary architecture. Or it can let global markets force the needed adjustments on the American economy, a process that will almost certainly be painful and inflationary. This should be an obvious decision for American policymakers.