As we talked about last week, for decades, globalization was a driving force behind the modern economy. Trade flourished and countries became more interconnected than ever before. World trade especially surged after the early 2000s following China's entry into the WTO. 

With a trade war now taking shape, globalization could become de-globalization—and have major implications for the U.S. dollar. What does de-globalization look like? Exporting countries become more self-sufficient 

• As incomes rise and middle classes grow, many developing countries—particularly China and India—are turning inward. China’s leadership has made reducing reliance on exports a key goal. Its dual circulation strategy promotes boosting domestic consumption while de-emphasizing external demand.

• Private consumption now makes up more than 38% of China's GDP, and that number according to the World Bank is rising steadily. India is following a similar path, investing in domestic manufacturing and consumer demand to fuel growth rather than relying on exports to the West.

 Rising geopolitical tensions

• Trade has evolved from an economic tool into a geopolitical lever. The U.S. and China relationship has shifted from cautious cooperation to strategic rivalry. Tariffs, tech bans, and supply chain restrictions are becoming the norm, pushing countries to reconsider their economic alliances and increasing protectionism across the globe.

Why this matters for the dollar

The U.S. dollar has been the foundation for global trade and finance (info on the dollar’s history here), accounting for roughly 60% of global foreign exchange reserves and is used in 88% of all international transactions. This dominance gives the U.S. massive advantages, including cheaper borrowing costs, economic influence, and deep demand for its assets. But as the world shifts away from globalization and toward regional trade and financial systems, the dollar’s dominance could start to erode.

Here's how de-globalization can chip away at the dollar:

• More non-USD based transactions. If countries like China conduct more trade with Europe and settle transactions in euro, yuan, or cryptocurrency, global dollar usage would decline. 

• Less capital flows into the U.S. and rates may rise. Foreign investors support the U.S. economy in part by purchasing U.S. Treasuries, with current holdings totaling around $8.5 trillion. However, rising trade tensions and geopolitical uncertainty could prompt a shift away from U.S. debt toward other perceived safe-haven assets like gold. This shift could put downward pressure on the U.S. dollar while pushing yields higher.

• Lower U.S. consumption due to tariffs. The U.S. has historically been the world’s top consumer, but rising protectionism may cool that role. A very recently proposed new 145% tariff on Chinese goods, for example, could raise import prices sharply, slow domestic growth, and weaken dollar demand further.

What it means for markets and investors

We believe the dollar won’t disappear but it could share the stage. Shifting toward a more multipolar currency system—with the euro, yuan, or even digital assets gaining traction—is already underway. History shows that reserve currency transitions are gradual, often spanning decades. But even a partial shift can impact markets.

Here’s what to consider:

• Yields may rise. If foreign demand for U.S. Treasury prices decline, interest rates—especially on the long end of the curve—could push higher than they are today. With less global trade, shifting capital flows, and rising geopolitical tensions, market participants will pay closer attention to how currency and interest rate movements affect portfolio outcomes–especially those that hold bonds. We have recently seen the link between U.S. rates and the U.S. dollar break.

  

• Global diversification matters. As the global financial system becomes more regionally fragmented, areas like Asia and Europe—where currencies are gaining ground, valuations are more attractive, and trade ties are strengthening—could receive greater capital from investors looking for diversification beyond U.S. markets. This has actually already started—reflected in the relative returns this year between the U.S. and markets outside the U.S.