Writing in The Guardian, US economist Eduardo Porter warns that the economic policies of the Donald Trump administration, especially its stated intentions to weaken the US dollar, could undermine the so-called "excessive privilege" that the US has enjoyed since the end of World War II, namely the dollar's dominance of the global financial system.
While Trump's advisors argue that this privilege has become a burden on the US economy and contributes to the trade deficit, implementing this vision could backfire and threaten Washington's financial leverage and ability to finance its debt at low cost, as well as destabilize the global economy.
The Dollar Between Politics and Economics
According to Porter, the Trump administration is adopting a dual and contradictory policy: On the one hand, it warns countries not to do without the dollar, while on the other, it promotes internally the idea that the dollar's status as a global reserve currency is an unnecessary burden on the U.S. economy.
Stephen Miran, economic advisor to the president and a member of the Federal Reserve Board, argues that this situation pushes the US to export Treasuries to meet global demand for safe assets, artificially inflating the value of the dollar and preventing the balance of international trade.
But Porter calls this thinking "dangerous economic magic," as it can easily translate into policies that undermine confidence in the dollar and reduce its appeal as a safe-haven currency.
Limited alternatives to the dollar
Despite the criticisms, there is no currency that can compete with the dollar in the foreseeable future.
The euro still suffers from divided European financial markets and the absence of a single European bond.
The Chinese yuan (RMB) faces strict capital controls that prevent it from being used as a major reserve currency.
The report notes that about two-thirds of the world's countries peg their currencies to the dollar to protect their economies from global shocks, and that abandoning this system could increase financial volatility and destabilize international trade.
Excessive privilege: Blessing or burden?
It is true that the dollar's status as the global reserve currency attracts huge amounts of capital to US Treasury bonds, but this is - as Porter emphasizes - "a gift that should not be given away," because it enables the US government to finance its debt (equivalent to about 120% of GDP) at low interest rates, and gives it a strategic advantage in imposing economic sanctions and controlling the international financial system.
If this situation worsens, the U.S. will lose some of its global financial leverage and the cost of borrowing will rise, exacerbating budget deficits and threatening the stability of the dollar itself.
The trade war and its impact on the dollar
The article notes that Trump's trade war and tit-for-tat import tariff policies are weakening the dollar's role as an insurance policy against global market volatility. As the volume of US imports declines, the relationship between the value of the dollar and the prices of globally traded commodities diminishes, making the dollar less attractive as a hedging currency.
Boston University economist Tarek Hassan explained that these policies raised US interest rates by about half a percentage point and led some developing countries to borrow in other currencies such as the Swiss franc and the yuan to avoid higher dollar financing costs.
Signs of Declining Hegemony
According to recent data, the dollar's share of global foreign exchange reserves has fallen to just 58% from 74% at the turn of the millennium. The spread between US Treasury yields and those in other markets has also narrowed, signaling a gradual erosion of the dollar's long-standing "safety feature."
When Trump announced a new round of "tit-for-tat" tariffs in April, US markets saw stocks, bonds and the dollar fall sharply in what was seen as an emerging market meltdown, setting a dangerous precedent for the dollar's reputation as a safe haven asset in times of crisis.
Potential repercussions for the global economy
Porter warns that the collapse of confidence in the dollar will create a global financial vacuum that will be difficult to fill:
Europe may try to use the opportunity to launch a single bond to strengthen the euro's position.
But that won't prevent the cost of "global financial insurance" from rising, meaning that volatility and risk will rise for everyone.
While a weaker dollar may temporarily reduce the U.S. trade deficit, it will come at a "high price": the loss of U.S. financial and political influence, which for decades has been one of the pillars of the international system.
Conclusion
Trump's dollar policies reveal a fundamental paradox: He seeks to reduce the trade deficit by weakening the dollar, but in doing so he threatens the most important instrument of American power - the currency that has made the United States the world's financier and center of gravity.
What some call the "dollarization" of the U.S. economy could, if it continues, turn into the most dangerous self-inflicted attempt to undermine the U.S. financial empire from within.
comments