War and Currency: How Would Trump's Withdrawal from NATO Affect the US Dollar?

In the recent U.S.-Israel-Iran conflict, NATO’s European allies refused to cooperate with U.S. military operations and limited the U.S. military’s use of their military bases. For example, Spain limited U.S. troops’ use of its airspace, Italy refused U.S. aircraft landings, and the UK limited the purposes for which bases could be used; they also did not participate in escort and convoy operations. These “acts of defiance” infuriated Trump. Previously, Trump had already repeatedly threatened to withdraw from NATO; on April 1, he further said he was “seriously considering withdrawing from NATO” and questioned the credibility of NATO’s collective defense clause.

For a long time, Trump has been attacking NATO member states for “riding for free” on the U.S. on defense matters; this kind of rhetoric is nothing new. Meanwhile, in 2023, the U.S. Senate passed a bill introduced by then-Florida Republican Senator Rubio (now the U.S. Secretary of State), which would prohibit the president from withdrawing from a security alliance without congressional approval (either a 2/3 majority in the Senate or Congress passing a new law). All of these factors reduce the likelihood that Trump would unilaterally withdraw from NATO.

But Trump can still substantially weaken NATO by refusing to carry out the collective defense treaty, or by recalling the U.S. ambassador to NATO, canceling the U.S.’s participation in military exercises and intelligence-sharing programs, and so on; he also cannot be ruled out from ignoring existing law and bypassing Congress to announce withdrawal from NATO. In 2025, the U.S. forces in NATO’s eastern flank have been reduced by about 10,000 troops. And the U.S. National Security Strategy released last December requires that, in order to free up more resources for the Indo-Pacific region, Europe must take on most of NATO’s conventional defense capabilities by 2027 (including intelligence, missile systems, and forces).

As NATO—the most core transatlantic security mechanism since the Cold War—NATO is not only a military alliance, but also a security pillar of the dollar system. Under Bretton Woods II, the U.S. provides a global security umbrella (NATO, and Middle Eastern maritime security) and exports dollars; non-U.S. countries export cheap goods and energy, and invest the surplus into dollar assets (mainly U.S. Treasuries). Once the U.S. withdraws from or substantially weakens NATO, the postwar “defense + finance” integrated system may accelerate its reconstruction.

And this U.S.-Iran conflict has further exposed the U.S.’s major shortfall in providing security protection to the Gulf region, which will prompt Middle East oil-producing countries to reassess their dollar-denominated reserve assets. Iran also uses this opportunity to hold the Strait of Hormuz firmly in its grip, begin building a toll collection system, and require that tolls be settled in renminbi or cryptocurrency.

A shift in security commitments undermines allies’ incentives to hold dollars

First, U.S. military allies are the largest holders of dollar reserves. NATO plus non-NATO allies (such as South Korea, Japan, Singapore, Malaysia, and Thailand, as well as in the Middle East Israel, Egypt, Kuwait, and Qatar) hold about 55% of the world’s security dollar assets, and over the past ten years this proportion has remained stable between 50% and 60%.