What happened?
The Bank for International Settlements (BIS) issued a significant warning about the US dollar undergoing an unprecedented “historic stress test” due to global financial instability. The dollar has experienced its largest decline since the early 1970s, dropping 10% since the start of 2025. This drop is coupled with rising government bond yields, creating concerns about the dollar’s status as a safe haven.
Who does this affect?
This situation primarily affects global financial markets, investors holding US assets, and countries heavily reliant on trade with the United States. The policy upheavals and uncertainties are transmitting across economies more swiftly, impacting financial conditions worldwide. Non-US investors have increased hedging activities due to volatility, suggesting waning confidence in dollar-denominated assets.
Why does this matter?
The situation matters because it poses risks to global market stability, challenging the traditional safe-haven role of the US dollar. These developments could alter the perception of US financial credibility and impact global financial conditions, making them more sensitive to US policy decisions. Furthermore, the potential shift in currency dominance might also influence the adoption of digital currencies like stablecoins, which could either threaten or reinforce US dollar dominance depending on regulatory outcomes.