The United States is happily chipping away at the pillars holding the dollar up as the world’s reserve currency, with the latest blow from some powerful Americans questioning the rule of law after Donald Trump’s conviction.
In doing so, it effectively dared the rest of the world to look for an alternative – and so far, it appears to be winning.
The attack on the legal system following the conviction of former President Trump follows another move seen by some as the United States throwing a challenge to the rest of the world.
The country has radically increased its use of sanctions as a punitive foreign policy tool. And it adds enormous debt, leaving unhappy foreigners looking for safety and market depth to finance the excess.
Over the past three weeks, I’ve asked financial services executives, global investors and other experts in Asia and the United States how long they think America can last without meaningful blowback. Several sources requested anonymity to speak candidly about the situation.
The conversation revealed a sense of confusion, both at home and abroad, about the consequences of US hubris. But even if they try, no one can find a credible alternative or expect it to emerge anytime soon, and that’s partly to blame.
In Asia, for example, people are quickly asking what ‘America plus 1’ is, as they look for ways to reduce US exposure and boost non-dollar trade flows.
But efforts to build such a system have been slow or not gaining traction. And rising authoritarianism, threats to individual and property rights and geopolitical tensions mean that while US assets are less attractive than ever, other options are worse.
Recent surveys, for example, show central bank reserve managers plan to increase dollar holdings over the next 12 to 24 months as global geopolitical tensions and the need for liquidity pull on the currency.
“Perhaps ironically, the strength of the U.S. dollar is, in part, due to its almost unchallenged safe-haven status,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University, who served on President Ronald Reagan’s Council. Economic Adviser. “That said, most investors don’t understand geopolitics and the dangers lurking beneath the surface – until it’s too late.”
Dollar dominance
In essence, the dominant role of the dollar in the world derives from the democratic principles of the United States. It is supported by the large size of the economy, the depth of the market, and the strength of institutions and the rule of law.
Belief in democracy runs deep. Last week, I asked U.S. Securities and Exchange Commission Chairman Gary Gensler, who has served in the administration since 1997, whether partisan politics has made the job of officials like him more difficult. A conservative US appeals court has struck down one of its signature initiatives this morning.
“I believe in this constitutional system that we have. It’s messy,” said Gensler. “It’s a democracy.”
However, the turmoil is testing some of the fundamentals of the dollar’s global appeal.
Attacks on the US legal system have intensified after Trump’s ruling in a New York court. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on the social media platform X, saying “the verdict represents the culmination of a legal process that has been bent by the political will of the actors involved.”
Major investors in Asia say potential threats to US institutions are also worrying. Any debasing of the authority of the Federal Reserve – as allies of Trump are reportedly contemplating – will affect the credibility of the dollar, investors said, adding that such a development could see a double-digit depreciation of the currency.
Trump’s campaign for the Republican presidential bid has played down reports of what the conservative group is planning.
The thickness of the sanction
A senior financial services executive in New York who is traveling in Asia said he has heard from clients who think US and Western financial policies are “damaging the dollar and the Western financial system more broadly.”
He pointed to “growing sanctions” as one of the reasons.
And West pushes the envelope further. Financial executives say talk that the West could seize some of the $300 billion in Russian state assets blocked in Ukraine is undermining the United States’ sanctuary status. “West crossed the Rubicon there,” the executive said.
An October 2021 Treasury Department review of sanctions found the denomination had increased to 9,421 that year from 912 in 2000. In that time, “America’s adversaries — and some allies — have reduced” their use of the dollar.
Asia-based investors say they are watching another court case closely to test the power of the rule of law: ByteDance’s challenge to the US ban on TikTok. They are monitoring the evidence that the US government will produce to back up claims the app is a national security threat.
If no evidence is publicly offered, it will “feel that the checks and balances, the independence of the legal system, may not be there – at least in this case,” the investor said.
But then added that it might not remove him from the United States. It’s still more independent and better than a lot of other places, he said.
Paritosh Bansal oversees the work of more than 100 journalists around the world who write about finance and markets, including banking, financial technology, stocks, bonds, forex, corporate finance, white collar crime and environmental, social and governance (ESG) investing. With around 25 years in the profession and degrees in economics, journalism and physics, Paritosh has reported and edited news files across the spectrum, from business and economics to politics and general news.
