Is the US dollar collapsing?

US president Donald Trump's tariff war with the rest of the world, many economic and financial experts think, could lead to the collapse of the US dollar as a global medium of exchange. Reports coming from the leading global financial service firm, J.P. Morgan research reports say that there is a 40 per cent probability that the U.S. economy is falling into a recession by the end of 2025. A recession is characterised by a decline in economic activities of a country marked by rising unemployment, decreased consumer spending, falling industrial productions etc. However, falling into recession does not mean the end of an economy, since the US has experienced, according to the Wikipedia, some 48 recessions since the mid-19th century. Whether a country is in a state of recession or not is known from its official recognition by the country concerned. So, until the US government, or the National Bureau of Economic Research (NBER), which defines recession as a 'significant decline in economic activity that is spread across the economy', is coming up with its report that the country is actually  experiencing recession, it cannot be said that the US is in  a recession. In the case of the Great Recession, it  started in effect in December 2007 following the global financial crash. But the NBER did not recognise it as such until next December. Similarly, the Covid-19 recession lasted three months from February to April of 2020, but its recognition through official announcement came in June of that year. So, even though signs of a recession are there, we would have to wait for NBER's report  to know if the US is already going through a recession.

But while awaiting US's declaration of a recession, the falling value of dollar is sending yet another alarming signal about the US economy's worth vis-à-vis those of its rivals like China. But then, are all other symptoms of USD in a free fall also there? Has the greenback been devalued to such a level that there is a widespread loss of confidence in the US economy? Have other countries stopped using USD as their reserve currency amid geopolitical shifts? If all these developments are there, then surely the dollar should be facing a deep crisis.

Now, the value of USD is undoubtedly falling in the world currency market. In fact, currencies are rising and falling all the time caused by fear of inflation, decisions of the central banks and various other factors. But what economists are worrying most about is the recent dramatic drop in USD value that reflects something very ominous. Especially, the US president's recent attempt to reshape world trade using tariff has resulted in the loss of confidence in the US. USD being a fiat currency which means its worth is not backed by gold or any other valuables, but by the rest of the world's trust in the US as a stable and dependable economy. Also, the political power of the US government matters. The US dollar's dominance in cross-border trade and as a safe haven has been nurtured by the US administration, whichever of the two parties was in office, over the past decades. All these factors helped keep US borrowing cost down and allowed the country project power abroad. In this connection, the University of California economist Barry Eichengreen, for instance, says: "Global trust and reliance on the dollar was built up over a half century or more"…"But it can be lost in the blink of an eye".  So, what has happened meanwhile that seriously damaged USD's image?

Actually, since mid-January, the dollar has fallen by 9 per cent among a  basket of currencies. Such a steep decline in value is a rare development in the last three years. In fact, a continuously steep fall in dollar's value is indeed a matter of concern for practically the entire world for the simple reason that it is the world's reserve currency. But we would still have to wait for a while to say anything final about US dollar.

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