A US dollar crisis would leave the UK "highly exposed" – "Instability could trigger global inflation"

FINANCIAL experts have warned a US dollar crisis would leave the UK “highly exposed” and trigger global inflation.

The dollar has fallen by about 8% since Donald Trump became US President.

“You make a hell of a lot more money with a weaker dollar,” he said earlier this year.

If the dollar declined, it woud result in imported inflation, volatility in gilt markets and heightened pressure on UK financial institutions that rely on dollar funding, experts warned.

Others have said that while “sterling will inevitably feel the ups and downs of dollar cycles, a wholesale dollar collapse just isn’t the base case”.

Anita Wright, Chartered Financial Planner at Ribble Wealth Management, fears the pound is in a vulnerable position.

She continued: "If the dollar entered a phase of rapid decline, the UK would be highly exposed. Sterling is not a reserve currency of comparable scale and remains tied to the dollar system through trade settlement, international reserves, and financial market linkages. 

"A weaker dollar could initially give sterling relative strength, but the knock-on effects would be destabilising: imported inflation from commodities priced in non-dollar currencies, volatility in gilt markets as global investors reassess sovereign debt, and heightened pressure on UK financial institutions that rely on dollar funding. 

“In short, sterling would not escape – it would be caught in the turbulence, though perhaps not at the epicentre. For UK investors, the lesson is to diversify and prepare for sustained volatility. Traditional portfolios heavy in equities and long-dated bonds may prove especially vulnerable if the dollar shock triggers a global de-rating of risk assets.”

Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, agreed the decline of the dollar would affect the pound – but “not catastrophically”.

He added: "Like Mark Twain's famous quote on exaggerated death reports, predictions of the dollar's demise persist despite its dominance: 90% of FX transactions, 58% of global reserves, 64% of world debt. A dollar crisis would significantly impact the UK but not catastrophically. 

"Dollar weakness might reduce import costs initially, but currency instability could trigger global inflation. The UK imports energy, food, and goods priced in dollars, while London's financial role creates substantial dollar exposures for banks and funds. 

"UK investors should diversify portfolios, reduce dollar concentration, increase real assets (property, commodities, infrastructure), and consider multi-currency accounts. Current geopolitical tensions raise concerns, but any crisis would likely unfold over years, not months."

Harry Mills, Director at London-based Oku Markets, said the dollar “isn't going anywhere any time soon”.

He added: "The dollar is known as the world's currency for a reason: it is the pricing currency for most commodities, it is the most-used currency for international payments and transactions, it is the currency behind the world's largest debt market, it is the currency behind the world's largest stock markets, and so on.

"There may be mounting pressure on the dollar, but it simply isn't going anywhere any time soon. In fifty or a hundred years, maybe things are different – after all, the world moved away from the British pound, the Dutch guilder, the Spanish silver dollar, the Florentine florin, and the Venetian ducat.

"For the UK, that means sterling will inevitably feel the ups and downs of dollar cycles, but a wholesale dollar collapse just isn’t the base case. Investors should think in terms of sensible diversification; holding a mix of assets, avoiding too much exposure to any one market or currency, and perhaps keeping an allocation of gold or inflation-protected bonds."

Samuel Mather-Holgate, Independent Financial Adviser at Swindon-based Mather and Murray Financial, said US President Donald Trump is partly to blame for the dollar's decline.

He continued: “The dollar has had a predictable crisis since it took on private sector debt during the global financial crisis. That said, Trump exacerbates the issue with his unfunded spending and bulldozer-like leadership. However, his tenure is for only three more years, and the next administration can easily turn this around and ensure the dollar does not fall off a cliff. 

"Trump has made it his mission to weaken the dollar, and that's what is happening. It's not like the markets have turned against Trump, but rather with him. He's the piped piper of the currency trade and he can lead them away from the river whenever he wants.”

But David Belle, Founder and Trader at Fink Money, countered, saying the dollar is in a strong position.

He added: "If you consider the trade weighted dollar index, it’s down only 7.5% year-to-date (YTD). Lots of the dollar move has been hedging-related and not so much to do with outright selling of the dollar. What foreign investors have done is simply increase their hedging ratios on previously unhedged positions. 

“Likely this is due to the geopolitical volatility that Trump brought in with regards to tariffs. But there has been little lack of US asset demand over the period, as we can see from how the stock market is behaving.”