Tariffs & the Shifting Role of the U.S. Dollar

For decades, the U.S. dollar has reigned supreme as the world’s reserve currency, underpinning global trade, investment, and economic stability. This dominant position, often referred to as the “exorbitant privilege,” has enabled the U.S. to maintain cheaper borrowing costs, predictable exchange rates, and larger deficits without significant economic fallout.

But the ground is shifting. Global tariffs unleashed by Trump and geopolitical tensions, particularly between the U.S. and China, and an increased focus on supply chain security have triggered unprecedented shifts in global trade dynamics led by President Trump's administration.

To those at the helm of mid-market enterprises, these seismic changes may have felt slow-moving and distant until recently. Still, the events of the last two weeks and their potential impact on financial strategy, procurement, and everyday operations cannot be overstated.

What’s changing, and why does it matter now? For decades, nations like Japan and China have willingly accepted U.S. dollars as payment for goods and services sold to U.S. companies and consumers, using them as a safe reserve currency. However, as global economic dynamics shift, the long-term dominance of the greenback as the world's primary reserve currency is increasingly being called into question. Europe is navigating its evolving relationships with the United States, while China has grown powerful enough to engage in a full-scale trade war with the world’s leading superpower. These developments are reshaping the financial landscape, challenging the greenback's once-unquestioned supremacy.

Consider this striking fact: foreign governments and institutions currently hold over $7 trillion in U.S. Treasury securities - more than the total government debt the US has to refinance over the next 24 months. These holdings not only reflect confidence in the U.S. dollar but have also formed a crucial support system for America’s economic structure. They fund unprecedented deficits that the US has enjoyed for decades. A shift away from such reliance could have wide-ranging consequences for businesses globally.

What’s Driving the Shift?

1. Onshoring Push in the U.S.

Amid Trump's government tariffs rollout and renewed calls for supply chain security, the U.S. is focused on producing more goods domestically. Geopolitical tensions with China and vulnerabilities exposed by the pandemic have accelerated this transformation.

Goods once predominantly imported, such as semiconductors and essential technologies, are increasingly being manufactured on home soil. While this shift is good for domestic industries, it reduces the global demand for the U.S. dollar in trade transactions, an effect mid-market businesses must prepare for.

2. China’s De-Dollarisation Efforts

China, long dependent on the U.S. dollar for trade, has launched de-dollarisation campaigns aimed at reducing that reliance. Recent agreements to settle oil trades with Brazil in yuan exemplify this strategy. Additionally, the rise of digital currencies, including central bank digital currencies (CBDCs), is further disrupting dollar-dominated trade norms.

China has been increasingly pushing for the use of the renminbi (RMB) in its global trade engagements. One significant milestone in this effort is the trading of oil futures in Shanghai, priced in RMB rather than U.S. dollars, which has gained traction among Middle Eastern oil producers. This move not only strengthens the renminbi's position as a viable currency for international trade but also challenges the hegemony of the U.S. dollar in global energy markets. By encouraging its trade partners to adopt the RMB, China aims to enhance its economic influence and reduce exposure to dollar-based fluctuations, marking a decisive shift in global financial dynamics.

A significant concern among investors is how China’s dollar strategy might unfold. If market participants begin to anticipate large-scale selling of U.S. Treasuries by China, this could trigger capital flight, eroding the dollar’s strength. Something that came to the fore the week after Trump's recent tariff announcement on the 2nd of April 2025.

3. Rise of Digital Currencies and Non-USD Trade

Technological advancements, combined with geopolitical motives, are fuelling the adoption of alternative currencies in global settlements. Whether it’s Russia-India trade conducted in rubles or yuan trading agreements with African nations, the share of non-USD payments is rising.

The result? A Diminished USD Demand

These trends collectively lower the global need for USD reserves. Businesses could face increased volatility in cross-border transactions as the cushion provided by widespread dollar usage starts to thin.

What Is the Exorbitant Privilege and Why It Matters

The U.S. dollar has historically benefitted from being the world’s reserve currency, giving it a unique edge.

Here’s why that’s significant:

• No risk of balance of payments crisis: The U.S. has been able to pay for its imports using the U.S. dollar as there were few concerns about its strength.
• Lower Borrowing Costs: Global demand for U.S. Treasury securities keeps interest rates lower than they’d otherwise be.
• Deficit Flexibility: The U.S. can run larger deficits as countries are eager to hold dollars as savings.

For private businesses, access to cheap capital and stability in currency has been an indirect boon, streamlining operations and growth. However, mid-market CFOs need to recognise that these advantages may weaken in the years ahead.

What Could Change and What CFOs Should Watch

Over the next 5–10 years, several risks could arise for businesses heavily reliant on the dollar-dominated global economy.

Potential Risks CFOs Need to Monitor

• Higher Borrowing Costs: Reduced demand for U.S. Treasuries could result in higher interest rates.
• Greater FX Volatility: Exchange rate swings may make procurement unpredictable and expensive.
• Pressure on Import Prices: Goods priced globally in non-USD currencies may become costlier to source.

Strategic Takeaways for Mid-Market Finance Leaders

For CFOs of mid-market businesses, navigating the shifting role of the U.S. dollar requires strategic foresight and agility. Here are key steps to consider:

1. Build Resilience Against Volatility

Invest in systems such as HedgeFlows that enable faster, real-time decision-making for treasury and risk management. Budgeting and forecasting tools that incorporate dynamic scenarios are invaluable when economic conditions are unpredictable.

2. Diversify Funding Sources

Explore non-dollar-denominated funding options or global capital markets to hedge against dollar-specific risks.

3. Monitor Risks Proactively

Regularly assess creditor, supplier, and even banking risks. Be prepared to act swiftly in response to economic or geopolitical changes.

4. Manage Currency Exposure Strategically

Adopt robust FX risk management strategies. Consider currency hedging where needed to reduce exposure in global transactions.

5. Stress-Test Your Financial Models

Run scenarios assuming sharper interest rate hikes or heightened FX volatility to ensure preparedness for potential shocks.

6. Stay Educated and Proactive

Keep a close watch on insights from trusted organisations like the Federal Reserve, IMF, and financial publications. Diversify the information sources to avoid falling prey to echo chambers.

Closing Thoughts: What Comes After the Dollar?

"There are decades where nothing happens; and there are weeks where decades happen"

-Vladimir Ilyich Lenin.

While the U.S. dollar isn’t losing its dominance overnight, we’re entering a world where its supremacy is no longer unassailable. For mid-market CFOs, this shift signals an essential call to prepare for a future where currency multipolarity dominates.

Mid-market enterprises that proactively adapt to this evolving landscape will mitigate risks and position themselves for long-term growth in a changing financial ecosystem.

The steps you take today will determine your ability to thrive tomorrow.

For tools that can help you assess FX risks or plan for economic volatility, explore solutions tailored for mid-market businesses today.