Paritosh Bansal
(Reuters) – The United States is cheerfully chipping away at the foundations that hold the dollar together as the world’s reserve currency, with the latest blows coming from some powerful Americans questioning the rule of law following the conviction of Donald Trump.
In doing so, he is effectively challenging the rest of the world to find an alternative—and so far, he appears to be winning.
The attack on the legal system following the conviction of former President Trump follows other moves that some see as challenging the United States to the rest of the world.
The country has radically expanded its use of sanctions as a punitive foreign policy tool. And it adds to the enormous amount of debt, leaving hapless foreigners who seek the safety and depth of its markets to finance its excesses.
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 Americans can keep doing this without a significant backlash. Some sources asked to remain anonymous in order to speak candidly about the situation.
These conversations showed that there is growing concern both at home and abroad about the consequences of US arrogance. But despite all the attempts, no one has yet been able to find a credible alternative and doesn’t expect one to appear any time soon, and partly they themselves are to blame for this.
In Asia, for example, people are increasingly asking what their “America Plus 1” is as they look for ways to reduce their influence on the US and increase non-dollar trade flows.
But efforts to build such systems are moving slowly or lacking support. And growing authoritarianism, threats to individual and property rights, and geopolitical tensions mean that even if U.S. assets become less attractive than before, other options will be even worse.
Recent research, for example, shows that central bank reserve managers plan to increase their dollar holdings over the next 12 to 24 months as rising global geopolitical tensions and the need for liquidity draw them toward the currency.
“Perhaps ironically, part of the strength of the U.S. dollar comes from its virtually unchallenged safe-haven status,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University who served on former President Ronald Reagan’s Council. Economic consultants. “However, most investors do not understand geopolitics and the dangers that lurk beneath the surface—until it is too late.”
DOMINANCE OF THE DOLLAR
At its core, the dollar’s dominant role in the world rests on the democratic principles of the United States. It is supported by the sheer size of the economy, the depth of markets, the strength of institutions, and the rule of law.
Faith in democracy has deep roots. Last week I asked SEC Chairman Gary Gensler, who has been in government since 1997, whether partisan politics had made the jobs of officials like him more difficult. A conservative US appeals court that morning rejected one of his signature initiatives.
“I believe in the constitutional system that we have. She’s a mess,” Gensler said. “This is democracy.”
Still, the turmoil is testing some of the fundamentals of the dollar’s global appeal.
Attacks on the US legal system intensified after Trump’s verdict in a New York court. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on social media platform X, saying that “the verdict represents the culmination of a legal process that was subject to the political will of the parties involved.”
A major Asian investor said potential threats to US institutions were also a concern. Any erosion of the Federal Reserve’s authority, as Trump allies have reportedly suggested, would affect confidence in the dollar, the investor said, adding that such a development could lead to a double-digit depreciation of the currency.
Trump’s campaign for the Republican presidential nomination has downplayed such reports of what conservative groups might be planning.
LATCH SANCTIONS
A senior financial services executive from New York who was traveling in Asia said he hears from clients who believe U.S. and Western financial policies are “undermining the dollar and the Western financial system more broadly.”
He pointed to the “ever-expanding threat of sanctions” as one of the reasons.
And the West is expanding the boundaries of what is possible. The finance executive said discussions that the West could confiscate about $300 billion in Russian sovereign assets that have been blocked over Ukraine have undermined the safe haven status of the United States. “The West crossed the Rubicon there,” the leader said.
A Treasury Department review of sanctions in October 2021 showed that by this year the number of such designations had increased to 9,421 from 912 in 2000. At the time, it noted that “American adversaries—and some allies—are already reducing” their use of the dollar.
The Asia-based investor said he was closely watching another court case to test the strength of the rule of law: ByteDance’s challenge to the U.S. ban on TikTok. He is monitoring the evidence the U.S. government provides to support claims that the app poses a national security threat.
If no evidence is presented publicly, “there will be a feeling that there may not be checks and balances, independence of the legal system – at least in this case,” the investor said.
But then he added that even this could not turn him away from the United States. It’s still more independent and better than many other places, he said.