This is not a blip. The dominance of the US dollar is getting eroded

The process is already well under way. From here on, disruptive US economic and foreign policies could accelerate the decline.

- Vikram Khanna

Responding to the policy-driven market chaos in the United States, many analysts have, in recent days, been focusing on the fate of the US dollar. The behaviour of the world's most important currency has, of late, been wayward.

To recap some recent history: During the first week of April, soon after US President Donald Trump announced his so-called "reciprocal tariffs" on the world, equity markets fell. When this happens, market players typically take refuge in US Treasury bonds, which are supposed to be the world's safest financial assets—but they didn't. Treasuries sold off as well, pushing their yields higher. Surprisingly, the US dollar, which normally rises in response to higher bond yields, weakened instead, reflecting the waning confidence in US assets.

Investors have been exiting the dollar for a while. From the start of the year to mid-April, the dollar declined by 9.3 per cent against the Japanese yen, 9.7 per cent against the euro, 10.1 per cent against the Swiss franc and even 3.7 per cent against the Singapore dollar, with the sharpest moves coming after the bond market sell-off in early April.

Was this just a temporary freak phenomenon, or does it reflect something deeper and more serious? If so, what might that be? And if the dollar's decline continues, will that threaten its dominant status in any way, including its role as the premier reserve currency?

DOLLAR INVINCIBILITY QUESTIONED Some say the US dollar will remain invincible. It has, after all, survived other serious crises, such as the "Nixon shock" of 1971 when, in the face of rising external deficits which enabled other countries to accumulate dollars, then President Richard Nixon stopped the convertibility of the dollar to gold at US$35 an ounce. This led to temporary market volatility, but that died down, especially after petrodollars arrived following the oil shocks of the 1970s.