US Dollar Faces Major Test as BIS Warns of Deep Cracks in Global Financial System
In a landmark speech at the annual general meeting in Basel on June 29, BIS chief Agustín Carstens sent a stark warning signal: the global economy is entering a new period of uncertainty, and the US dollar’s status as the premier safe-haven asset is under serious challenge.
Carstens noted that while inflation has cooled somewhat and growth has picked up in the first half of 2025, policy changes from the US have quickly overshadowed the positive outlook. Abrupt shifts in tariffs, fiscal spending and controversial statements regarding foreign investors have sparked concerns about the stability of the global financial system.
“The announcement of a series of tariffs from the US has shaken markets. At the same time, ambiguous signals about central bank independence, discussions about sanctions on foreign investors, and implications for the legal system have created an unpredictable environment. Markets have reacted immediately with increased volatility. Notably, the dollar has fallen even as Treasury yields have risen, an unusual and worrying phenomenon,” Carstens stressed.
His remarks mark the first public acknowledgement from the BIS of the long-term risks to the US dollar’s hegemony. The USD has traditionally been seen as a safe haven in times of uncertainty. However, according to Carstens, Washington’s recent series of inconsistent and counterproductive policies have eroded global confidence in the stability of the US.
Carstens called on the international community to urgently address three core structural challenges that are dragging down growth and weakening the financial system: stagnant productivity, fiscal fragility and the rapid expansion of non-bank financial institutions (NBFIs). Meanwhile, the trend of trade fragmentation due to protectionist measures such as tariffs is fueling inflation and limiting the flexibility of economies to respond.
In the longer term, the BIS Director General said that governments should focus on institutional reforms to rebuild market confidence. This includes removing trade barriers, increasing public investment in sustainable infrastructure and encouraging more transparent and efficient markets.
Notably, Carstens also warned of the rapid but unregulated growth of non-bank financial institutions as a potential threat to the stability of the entire system. He asserted that there is a need for a “supervisory balance” between traditional banking institutions and the non-bank sector, especially as digital financial innovation is transforming the entire trading landscape.
Emerging trends such as the entry of big tech companies into finance, the rise of central bank digital currencies (CBDCs), and the use of artificial intelligence in financial services all present potential and systemic risks, Carstens said. He argued that a new financial architecture, in which central bank reserves are tokenized and government bonds play a core role, is needed to ensure control, transparency, and resilience in a context of prolonged uncertainty.
Carstens’ speech is seen as an urgent call to action for policymakers around the world. As the dollar loses its leadership and market confidence is eroded by policy uncertainty, rebuilding the global financial foundation based on principles of transparency, strong governance and substantive reform will be key to navigating this unprecedented period of fragility.