The status of the global reserve currency and the ever-expanding trade deficit seem to be natural adversaries. Economists call this contradiction the "Triffin Dilemma" — the US dollar needs to supply liquidity to the world through a long-term deficit, but the continuous deficit secretly erodes the dollar's credit foundation. Last year, the US trade deficit soared to $918.4 billion, which is not a coincidence but a full manifestation of this paradox in reality.

In simple terms, the dollar, as the global settlement currency (accounting for about 60%), flows overseas in large quantities through trade deficits, eventually settling in the form of foreign exchange reserves. These dollars are then used to purchase US debt and other dollar-denominated assets, forming a "commodity → dollar → US debt" cycle. How beneficial is this cycle? The US can almost maintain trade deficits at zero cost — with the privilege of "seigniorage," the US effectively levies an invisible tax on the global economy.

But this is where the problem lies: in the short term, the US benefits from cheap goods and continuous capital inflows, but in the long run, it risks industrial hollowing-out and sinking into a debt quagmire. Things can get even more complicated. When Federal Reserve policies are influenced by political factors, contradictions are amplified. In 2024, the Fed’s decision to hold steady and delay interest rate cuts led to a strong dollar and an expanded trade deficit — the logic seems a bit inverted, but this is the reality.

The "siphon effect" of dollar appreciation drains funds from emerging markets. These countries are forced to increase holdings of dollar assets to save themselves, which in turn deepens their dependence on the dollar system. This spiral of strengthening reinforces dollar hegemony but also embeds long-term risks.

Historically, after the collapse of the Bretton Woods system in 1971, the dollar bid farewell to gold, and the US gained this special privilege. Decades of practice have shown that this privilege is a double-edged sword — it can bring prosperity but also lead to recession. As more countries begin exploring diversification of reserves, the boundaries of dollar hegemony are quietly being rewritten.