Donald Trump is the only one threatening the dollar

By Robert Burgess

Donald Trump’s strategy for reelection is centered on speaking to the deepest, darkest fears of Americans. In his view, migrants streaming over the border are taking jobs away from Americans, especially Black workers (whatever that means). They’re not. Crime, he asserts, is way up. It’s down. The economy, he claims, is in shambles. The opposite is more accurate.

Now, the former president has come up with the idea that countries are avoiding the greenback. The dollar is “under major siege,” the Republican presidential nominee said on Saturday at a rally in Wisconsin. “You leave the dollar and you’re not doing business with the United States because we are going to put a 100 per cent tariff on your goods.”

The implication, like most things Trump says these days, is that only he can prevent such a calamity. And make no mistake, it would be a calamity if it were truly happening — but it’s not. The dollar is the world’s primary reserve currency, which is the source of the US’ “exorbitant privilege,” which allows the government to fund budget deficits in perpetuity and keeps interest rates lower than they might otherwise be. So, a move away from the dollar by foreign investors would make it harder for the US to borrow, therefore causing borrowing costs to spike.

For those not steeped in the foreign-exchange market, Trump seems to be riffing off the “de-dollarization” speculation that has cropped up in recent years. The thinking is that the US has “weaponized” the dollar through heavy financial sanctions imposed on Russia, including preventing that country’s central bank from accessing its foreign-currency reserves. As such, countries whose ideological leanings conflict with those of the US might want to move their reserves into the currency of a more friendly country. Indeed, when the foreign ministers of Brazil, Russia, India, China and South Africa convened in Cape Town in mid-2023, Bloomberg News reported that they asked the bloc’s specially created bank to provide guidance on how a potential new shared currency might work, including how it could shield other member countries from the impact of sanctions such as those imposed on Russia.

It won’t be an easy task. Since Russia invaded Ukraine in February 2022, use of the dollar in global transactions has only grown, jumping to 47.8 per cent as of July from 38.9 per cent, according to SWIFT, the member-owned cooperative that provides financial messaging services to more than 10,000 institutions and corporations in 210 countries. A decade ago, the dollar’s share was less than 35 per cent. Clearly, the world sees a benefit in transacting business in a currency where the rule of law takes precedence.

Credit: Bloomberg

It’s that commitment to the rule of law that draws capital from around the world to the US in good times and bad. Foreign holdings of US Treasury securities have surged by $1.14 trillion since the end of 2020 through June, better than the $1.07 trillion under all four years of Trump. It’s why the Bloomberg dollar index has strengthened 10.2 per cent under the Biden administration after weakening 11.6 per cent under the Trump administration. It’s why the MSCI USA Index of equities has surged 42 per cent since the end of 2020, almost 17 times the gain of the MSCI All-Country World Index excluding the US.

Credit: Bloomberg

What Trump conveniently neglects to mention when it comes to the dollar is how much damage he did to it while president. Erratic and unpredictable policies, both domestic and foreign, along with periodic threats on the ideals that underpin the rule of law created a crisis of confidence in America as a stable place to invest. The dollar’s share of global currency reserves tumbled from 65.4 per cent when he took office at the start of 2017 to 60.7 per cent when he left at the end of 2020 — which was the lowest since 1995. Under Biden, the dollar’s share of has stabilised, amounting to 58.9 per cent at the end of the first quarter.

Credit: Bloomberg

Even so, Trump’s “100 per cent tariff” plan on countries that shun the dollar contains a fatal flaw. It’s possible that such prohibitive tariffs could have the opposite of their intended effect and drive the countries away from the greenback, threatening the haven status of US Treasuries and “lead to massive dollar weakness,” Ulrich Leuchtmann, the head of foreign-exchange research at Commerzbank AG, wrote in a research note Monday. Trump wants to “force dollar dominance. That changes everything,” Leuchtmann wrote. “If the US were to impose prohibitive tariffs across the board, they would cause massive disruption to the global economic system.”

Like Don Quixote, who attacked windmills in the mistaken belief that they were wicked giants, Trump is known for assailing imaginary enemies or evils. But at least Quixote, after various humiliations, finally came to realize the folly of his quest and returned home. Trump has yet to reach that point.