Since November this year, the U.S. Dollar Index has continued the upward trajectory it began after the Federal Reserve’s rate cuts, briefly breaking above the 100 mark in early November and still holding above 99. This effectively reverses the weakening trend that had persisted since April. At the same time, dollar volatility has fallen back to levels seen before the U.S. presidential election, and the ICE MOVE Index, which measures Treasury market volatility, has dropped to a four-year low. These developments have led markets to believe that the foreign-exchange market has moved past the sharp turbulence triggered by the “Trump shock” earlier this year. Although markets are increasingly “immune” to a range of policy measures promoted by Trump, such as the reciprocal tariffs, this shift signals that the U.S. dollar is returning to its traditional role as a safe-haven asset and a stabilizer in investment portfolios. The dollar’s renewed stability is, of course, linked to conservative expectations for the Fed and the U.S. government’s recent shutdown. Yet it also undeniably reflects the unique dual nature of the dollar as both a sovereign currency and the world’s dominant international payment currency. This return to form has also made previous expectations of “de-dollarization” increasingly difficult to realize.

As the Triffin’s dilemma suggests, the dollar’s dual role makes it difficult to achieve a perfect balance between sustaining trade deficits and maintaining currency stability. In fact, the rise of “de-dollarization” discourse has been closely tied to the perception of a weakening international role for the dollar. According to the IMF’s latest COFER data on the currency composition of global foreign-exchange reserves, as of the end of the second quarter, the dollar’s share of disclosed global FX reserves fell from 57.79% at the end of the previous quarter to 56.32%, a drop of 1.47 percentage points. Its reserve share has now remained below 60% for 11 consecutive quarters, marking a new 30-year low. However, Guan Tao, the global chief economist at BOC International Securities, argues that this decline has not been accompanied by the rise of other currencies. Rather, gold has been the biggest beneficiary of the current wave of diversification in international reserve assets. Since the first quarter of 2024, gold has surpassed the euro to become the second-largest international reserve asset after the dollar. By the end of the second quarter of 2025, gold accounted for about 24% of global reserves that include gold, with the dollar at 44% and the euro at 17%. This also reflects the fact that existing non-dollar reserve currencies each face their own structural challenges, making it difficult for any of them to meaningfully challenge or replace the dollar.

For Trump, known for defying conventional logic, he still hopes to have it both ways. His wish is to shrink the U.S. trade deficit and fiscal deficit through higher tariffs, yet he also wants to avoid large swings in the dollar, and certainly does not want a weaker dollar that would undermine its status as the world’s dominant currency. Former People’s Bank of China (PBoC) Governor Zhou Xiaochuan has noted that the United States faces a dilemma when it comes to the dollar. On one hand, the U.S. wants a competitive exchange rate to promote the reshoring of manufacturing and improve its trade balance. On the other hand, it wants to maintain the dollar’s dominant position as the leading international reserve currency, both in global trade settlement and in international financial markets. As a result, the U.S. is in effect pursuing two mutually contradictory objectives. However, Zhou argues that achieving both goals is not entirely impossible, so long as no other currency mounts a serious challenge to the dollar. He sees that neither the euro nor the yen is realistically capable of replacing the dollar. While the internationalization of the Chinese yuan has made meaningful progress, its overall pace remains relatively slow; at the same time, among digital currencies, stablecoins are still far too small to serve as a substitute for the dollar. Therefore, despite the many challenges facing the dollar system, the dollar is likely to retain its central global role for some time, supported by the strength of the U.S. economy and its financial system. In this sense, the “currency wars” over the dollar’s strength or weakness have become part of a broader geopolitical, economic, financial, and political contest.

In its ongoing information-tracking research, ANBOUND has observed that as the reciprocal-tariff war comes to a close, the Trump administration is leveraging U.S. geopolitical influence to promote dollarization in preserving the dollar’s internationalized status. On one hand, despite the federal government shutdown, the U.S. has continued to provide aid to Argentina, offering dollar liquidity to help the country weather its difficulties. On the other hand, industry sources have revealed that Trump administration officials have been discussing ways to encourage certain countries, particularly those in Latin America, to expand their use of the U.S. dollar to help stabilize their monetary and financial systems. This appears to be a clear reflection of a dual-track foreign policy that simultaneously targets trade balances while promoting the external use of the dollar. While working to reduce the U.S. trade deficit, Washington continues to “export” dollars abroad to maintain its international influence. Under such circumstances, the importance of a stable dollar may outweigh concerns about the trade deficit, becoming the next policy focus for the U.S. government and allowing the dollar to maintain a position of strength and initiative in the ongoing “currency war”.

This situation suggests that the Trump administration is considering the creation of a dollar-based monetary bloc beyond U.S. sovereign borders to safeguard the dollar’s international standing. In fact, dollarization has long been present in several Latin American and Pacific countries. Around the year 2000, countries such as Ecuador and El Salvador adopted the U.S. dollar as legal tender in response to hyperinflation. Nations like Timor-Leste and the Marshall Islands also use the dollar as legal tender or peg their currencies to it. At present, the countries that recognize the dollar as legal currency are generally small in scale, have relatively low household incomes, and are mostly developing economies. After more than 20 years of dollarization, El Salvador has achieved greater economic stability and brought inflation under control. Although the country still faces structural challenges and its government has relinquished monetary sovereignty, it no longer suffers from high inflation. Ecuador’s foreign trade is dominated by oil and agricultural exports, while remittances from overseas migrants and laborers provide a substantial inflow of U.S. dollars. According to data from the Central Bank of Ecuador, cumulative remittances over the past 25 years reached approximately USD 71.724 billion as of 2025, indicating the unique characteristics of Ecuador’s economy under dollarization. It is worth noting that although Ecuador designates the U.S. dollar as its sole legal currency, its political and economic policies have not been heavily influenced by the U.S. Instead, the country pursues a diversified policy of openness in trade and investment. It has signed free trade agreements not only with Latin American nations but also with the European Union. In 2023, Ecuador signed an FTA with China, further strengthening bilateral cooperation.

Judging from media reports on countries that might potentially join a dollar bloc, they are generally developing economies, many of which are struggling with economic and financial distress. Persistent high inflation has eroded confidence in their sovereign currencies, creating a need to rely on the credibility of the U.S. dollar to stabilize their financial systems. Since taking office, Argentina’s President Javier Milei has repeatedly declared his intention to pursue dollarization as a solution to the country’s long-running inflation problem. The U.S. government has also supported the Milei administration by providing dollar liquidity through currency-swap arrangements, helping it stabilize the economy and reduce deficits. All these supports contributed to Milei’s victory in the midterm elections. Argentina’s real-world example has, in turn, become a model for other countries facing their own “currency crises”. Considering the greater convenience in trade and investment after dollarization, the prospect of adopting the U.S. dollar holds strong appeal for these nations.

Considering the differences among countries and regional contexts, the Trump administration’s strategy to promote dollarization is unlikely to create a unified single-currency zone like the Eurozone. It is more likely to adopt a flexible approach, similar to Argentina, where the sovereign currency is pegged to the U.S. dollar. The U.S. would provide dollar-backed credit and liquidity support, while the sovereign country implements fiscal and monetary discipline to achieve monetary and financial stability. The outcome would be a comprehensive opening of local markets to the U.S. and deeper economic ties between the U.S. and these economies, effectively forming a dollar economic sphere. Given the weak position of these countries’ domestic currencies, promoting dollarization would also facilitate the development of U.S. dollar-backed stablecoins in cross-border markets, enabling the dollar to expand its presence in the digital domain and further consolidate its dominance in the real economy.

Due to the economic strength of these countries, promoting dollarization among them is far from sufficient for the U.S. Such efforts not only do not align with its traditional investment and trade partners but also impose additional obligations and burdens on the U.S. government. Consequently, Washington’s efforts to consolidate the dollar’s position remain focused on its established trade and investment partners. For example, Australia recently signed a mineral resource cooperation agreement with the U.S., while its pension funds announced plans to increase U.S. investments from USD 500 billion to USD 1.44 trillion by 2035. Similar measures are reflected in U.S. trade agreements with Japan and South Korea. Under Trump’s high-profile criticism, Norway recently took urgent steps to suspend the ethical investment rules of its USD 2.1 trillion sovereign wealth fund to avoid being forced to sell shares of major U.S. tech companies such as Amazon, Microsoft, and Alphabet. These developments indicate that while the U.S. implements policies to raise trade barriers and reduce trade deficits, it does not want its traditional economic and trade partners to move away from the dollar. Instead, through U.S. capital markets and financial systems, these countries are further integrated into the dollar system, allowing the U.S. to maintain the dollar’s traditional influence. As a result, these nations remain the primary targets for U.S. efforts to promote dollarization.

This could further accelerate the push for a “currency war” to enter a new stage of geopolitical competition. ANBOUND’s founder Kung Chan believes that the Trump administration’s moves reflect the issue of constructing a new dollar zone in the world. This new dollar zone may overlap with areas of geopolitical influence, roughly encompassing the entire Americas, the Pacific region, the Middle East, and the Mediterranean region. He argues that the area in fierce contention with China is Eastern Europe. If the dollar zone incorporates this region into its sphere, the influence of the Chinese yuan will not only fail to expand but may actually be compressed. According to Chan, the reason for this is that countries’ currencies are forced to depreciate in order to respond to Trump’s tariffs and to maintain their own export positions. Such depreciation is therefore inevitable. Therefore, the construction and expansion of the dollar zone can, to some extent, be seen as a result of other currency zones’ self-contraction. This logic can also be contrasted with the economic growth trends in each region, which should roughly align. In other words, economic growth ultimately determines the value of a currency.

Final analysis conclusion:

At a time when the actual creditworthiness of the U.S. dollar is weakening, the United States has shifted its focus toward maintaining the dollar’s international status through geopolitical competition with other currencies. Promoting the establishment and expansion of a “dollar zone” essentially means that the Trump administration aims to transform the dollar from an all-pervasive instrument of the globalization era into a geopolitically oriented competitive tool. This, in turn, makes international finance and capital flows even more complex.

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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.