How low can the dollar go? The world’s reserve currency has declined by more than 10 percent in 2025, its worst start to a year in five decades. Why is this happening, and more importantly, why does it matter?
According to the economist Kenneth Rogoff, the dollar has long been under serious domestic and international pressure, but U.S. President Donald Trump’s policies are accelerating fears about the health and stability of the American economy. In the latest episode of FP Live, Rogoff describes what a global shift away from the dollar would look like and how that might impact the global order. Rogoff is the author of the new book Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead.
The full discussion is available to watch in the video box atop this page. What follows here is a lightly edited and condensed transcript.
Ravi Agrawal: It’s notable how much the dollar has declined this year. Ten percent is a lot.
Kenneth Rogoff: What’s even more worrisome is we see the dollar going down but interest rates going up. Usually the dollar going down is associated with a softening economy and lower interest rates. When interest rates go up and the dollar goes down, it’s more suggestive of foreign central banks pulling out of dollars and people generally holding less Treasury bills. I don’t think there’s any question that’s going on. But it’s not an overnight phenomenon.
RA: And just to put this in context, Ken, why does it matter if the dollar weakens? What are the potential impacts?
KR: So the thing we really care about is the interest rate. It’s how we pay our debt, our home mortgages, our car loans. We probably pay somewhere between half a percent and a percent less than we would otherwise. Interest rates on everything are lower because there’s a big global demand for dollars. So that’s certainly a big thing.
Having the dollar be the lingua franca of global finance affects our ability to impose sanctions and our ability to spy. Modern spycraft is probably 75 percent or 80 percent sitting with a laptop monitoring information, much of which is financial. And we get much more financial data than anyone else because things flow through the U.S. These are areas where Trump’s really undermining us.
But the dollar going down in value is really not bad when it starts this high. It’s bad for some people; it’s good for others. It’s good for exporters. Many manufacturers may not benefit as much. But services—insurance, accounting, consulting, intellectual property rights—are priced in dollars, and it just makes the U.S. cheaper relative to competitors. On the other hand, if you’re sending money back to your mother in Italy, and the euro’s gone way up, and you’re earning money in dollars, your mother receives less. So there are winners and losers.
I would say, on balance, this is one area where Trump was right; the dollar was really strong. And so I don’t think it’s altogether bad that it’s fallen. What’s bad is that other things that go with it may make our life more expensive in the future.
RA: Let’s talk about the phrase “exorbitant privilege.” It was coined by the French president Valery Giscard d’Estaing in the 1960s to complain about the benefits that the United States got from being the world’s reserve currency. Basically, the U.S. can borrow at lower interest rates, run large trade deficits, print money to finance its budget deficit. Why does Trump think that these privileges are actually a burden for Americans?
KR: Well, it is indeed a unique point of view; I don’t want to dismiss it entirely. Trump and Stephen Miran, head of his Council of Economic Advisers, have this exotic idea saying that because people want the dollar, in addition to the main effect of lowering our interest rates, it also makes U.S. goods more expensive. And I don’t want to say that’s completely wrong.
But let’s remember the dollar has gone through cycles where it’s low. It was really high in 2002, but it was 40 percent lower after that, but we were still the reserve currency. There are lots of things that bid up the dollar. We’re good in tech, in biotech, in farming. All of this bids up the value of the dollar and makes it harder to make Nike shoes in the United States.
And other countries are concerned because the Mar-a-Lago Accord plan, the plan to solve this overvaluation of the dollar, calls for defaulting on our debt to foreign governments. Trump has said, we’re never going to do that, but China, Britain, people who manage foreign currency reserves are all looking at that, too.
RA: Since you mentioned your book and the essay that you wrote in Foreign Policy, there are all these parallels that are very interesting between [former U.S. President Richard] Nixon and Trump. Nixon took America off the gold standard. There was a sense that America was getting ripped off. But that decision plunged America into a decade of high inflation and slow growth. You argue that Trump also has this sense that America is being ripped off by the global system. Are we now also entering a period of slow growth and high inflation?
KR: The parallels are astounding. Nixon took us off the gold standard and now Trump is entering this period of chaos also. If you look at the “One Big Beautiful Bill” and the calculations of Treasury Secretary Scott Bessent and the Council of Economic Advisers, there’s nothing to worry about. The American economy will just grow and grow. But I think it’s more likely that we’re going to have slow growth with all the chaos. If we average the first and second quarters this year, growth looks to be about 1 percent. Not 3.5 percent growth, like everyone’s talking about. And so that’s likely.
And I think interest rates will frustrate Trump. He’ll want to bring them down. Say he gets to replace Fed Reserve chair Jerome Powell and the interest rates start coming down, inflation will go up. And Trump will get super frustrated and, again, follow some heterodox policies like allowing more inflation or financial repression. Nixon also tried a lot of things. He put on capital controls; he put on price controls; he had tariffs. We see a lot of those things today.
Today is a high-water mark of the Trump presidency. He got his signature piece of legislation passed. It seems to me that bombing Iran settled the so-called TACO name that he’d gotten: “Trump Always Chickens Out.” And I think that affects him in his tariff negotiations. It affected him in the congressional negotiations. But the chances that this doesn’t end well, that undermining our institutions, blowing up the global trading system, taking away Fed independence, might give a boost in the short term. But within the next year or year and a half, we actually will see a recession and higher inflation. And Trump may enact some surprising new policies out of frustration to deal with this.
RA: That is really sobering. If we get the high inflation or slow growth you’re describing, what does that mean for America’s place in the world? How will other countries start responding?
KR: If we get both of those things, it will definitely undermine our place in the world in many different ways. Again, it is still very strong right now. There’s that old joke: The fastest way to make a small fortune is to start out with a large one. And we started out very, very well. And so we’re still talking about the U.S. doing very well.
This all will accelerate diversification from the dollar. Again, it won’t happen overnight, but China is already breaking off. We’ll see much more of a regional currency. It’s developing its own ways of doing international transactions, being able to hold yuan, et cetera. I think the euro will step in. People who disagree list all the weaknesses of the euro: no fiscal union, no capital markets union. And there’s not a single bankruptcy law in Europe, believe it or not. So it’s hard to have capital markets integrated when being bankrupt in one country means something different in another country. But there’s a recognition that this is a real opportunity for the euro to make big inroads, even with the cards they hold.
RA: I have to push back on this. In any discussion about the weakness of the dollar, the immediate question is what are the alternatives? For instance, 88 percent of all foreign exchange transactions are in the U.S. dollar. The dollar accounts for 58 percent of foreign reserve holdings. So, how does replacement happen? Will the dollar’s strength be eroded by many things over time, or one catastrophic event?
KR: It’s already fraying at the edges. It’s losing market share. Reserves used to be 80 percent. Now they’re 58 percent. So they’ve gone down a lot. One thing which made the dollar so dominant is that China chose to link to the dollar. And now they’ve realized they did it for too long. If you want to peg to a currency, you need to follow similar interest rate policy to some extent. And so they’ve been breaking away for a decade out of that. But the sanctions on Russia were a cold blast of water. China realized that they can’t put themselves in a position to be exposed like that. Asia is 50 percent of the dollar bloc. China is the major trading partner for a lot of Asia. So part of Asia will get pulled away. In my book, and my FP article, I describe that even if the dollar stays on top, the loss of market share is a big deal. First of all, your interest rates go up. But sanctions, when there are other routes, are less effective. But there are very powerful reasons that not just China, but also Europe, doesn’t like the geopolitical power that dollar supremacy gives.
So I think we’re moving to a more tripolar world in the next 10 or 20 years. We’ve had it before. Between the wars, for instance, there was both the pound and the dollar. By the way, everyone thought we were moving to a tripolar system 20 years ago when Europe let Greece into the euro and they blew up. And Trump has pushed everyone back to where we might’ve been then had the world evolved a little differently.
RA: So where does cryptocurrency fit into all of this?
KR: It’s already eroded the dollar’s power in the underground economy, which is probably 20 percent of GDP. Sometimes dominance in that economy spills over. But there’s a lot of regulatory power to push back on that in most countries.
Now, there are different cryptocurrencies. Most people are familiar with bitcoin, but there’s another type called stablecoins, which the U.S. has been pushing very hard under the new Trump administration. A stablecoin is fixed in its value, so it’s not really a cryptocurrency in the same way. The U.S. has decided, instead of having the Fed issue a competitor to bitcoin, to do these private versions that are crypto-adjacent. Other places are having their central banks do this: Europe, China, Canada, Bank of England. But if the U.S. says stablecoins are kosher, they are. Personally, I think it will lead to a financial crisis sooner rather than later, but sooner still could be 10 or 15 years away.
RA: In your essay and your book, you said that the biggest vulnerabilities to the dollar come from within, like debt, tariff policy, and sanctions. The United States keeps imposing economic costs on countries—Russia, Iran, North Korea, Venezuela—when it has a problem with it. But part of the problem, Ken, is that the more the U.S. does this, the more you strengthen the system of countries outside of an American orbit.
KR: We were using sanctions promiscuously before Trump, but he hasn’t backed off of it.
China has to pull out of the system. China wants very, very badly to do something in Taiwan. They’re prepared to lose a million people. We’re probably not prepared to lose a hundred people. So what are we going to do? We’re going to put sanctions on. We’re going to seize their reserves. So they’re moving post-haste to be able to structure trade and develop a way to do transactions that we can’t sanction.
Europe’s sensitive to this, too. Back in 2014, when [then-U.S. President Barack] Obama wanted to put sanctions on Iran, Europe disagreed. And we said Europe couldn’t use our banking system. They had to back down. So we agree with Europe about a lot of things, but not everything.
So our promiscuous use of sanctions maybe strengthens our moral authority, but in the long run weakens our orbit. I’ve mentioned the big players, but there are plenty of Asian, African, or Latin American dictators who don’t want to be judged by the United States. So they’re also looking for alternatives. It’s not just our competitors.
RA: Ken, there’s an overlap here between the things you’re saying and a non-economic thing we often discuss on FP Live: the gradual relative decline of American power. It’s partly through overuse of its tools of power, and partly through interpreting the rules unequally. How much of that cuts into the dollar’s dominance? With sanctions, Ken, for instance, if you overuse your power to impose penalties on other countries, they may look for other systems or gang up against you. You can also see it in trade.
KR: You raise a host of interesting issues. Being a military power lets you bend the rules, not just on military but on things like finance. You see that crudely with Trump because he says what he’s thinking. He just told the BRICS countries that if they start thinking about going away from the dollar, he will put a 10 percent tariff on them. So it gives us a lot of leverage that other countries want to get away from.
You mention trade. We’re in the middle of the trade war. Trump’s threatening 1,000 percent tariffs or whatever, with enough bluster to prevent countries from countering. It’s effective for now. But trust me, if we put 20 percent tariffs on Vietnam or anybody, they’ll get us back. They’re going to do it while we’re not looking, when we’re at a weak point.
This will also erode the dollar because the higher tariffs are, the less globally financially integrated we are. And contrary to [Stephen] Miran’s argument that it’s horrible to be the reserve currency, we have benefited massively. And so that’s a way it’ll come back to bite us.
RA: You know, Trump is often credited for having a gut instinct for when things aren’t working. Whether or not his solutions are correct, that he’s able to diagnose when something is broken. What do you think he gets right in his diagnosis of the financial system?
KR: Let me start with a couple of big non-financial things. Clearly, we needed to reevaluate our relationship with China. It may be bloody and the American consumer may suffer. But [former U.S. President] Bill Clinton said just after he retired that China may pass us someday, but when they do, hopefully they will be a democracy. That seems unlikely at the moment. Trump was right on that. Another area is making Europe pay for its own defense. It’s been absolutely ridiculous. And we’ve known that for 60 years and tried before to change that. Trump had to have two terms to make progress, but he got something done. [Russian President] Vladimir Putin helped.
His idea of bringing back manufacturing jobs to the United States is nuts. We may bring manufacturing back, but we’re not bringing the jobs back. They’re going to be automated factories. We were having the same debate 50 years ago about losing agricultural jobs. Jump forward to today; we are an agricultural superpower. We are a big exporter, but there are no jobs. It’s all automated. So 10 or 20 or 30 years from now, how will we evaluate the Trump presidency? Maybe people will say he got a lot of things wrong, but he got the big things right. “My gosh, if we hadn’t had Trump, what would have happened with China?”
I have an open mind about stablecoins and this regime he wants to have. But I worry there will be too little regulation. It could be fine. It could work for 50 years. But I worry that in his zeal to deregulate, he will go too far. But I acknowledge I could prove wrong on that.