President Donald Trump wants a strong dollar. He wants the dollar to be strong because he despises weakness. His contempt for weakness justifies in his thinking the humiliation and bullying of others, less powerful than him. And who wouldn’t be more powerful than the president of the United States, who has the ready means to subdue the rest of the world? A weak dollar, he reckons, would by association imply his own weakness.
The audacity of Brazil (and countries like Russia, India, China and South Africa ‒ grouped together under the acronym “BRICS”) to think about how to best diminish or replace the dominance of the US dollar in global monetary structures, drew Trump’s ire. He threatened these countries – yes, you have guessed it – with 100% import tariffs if the project of an alternative reserve currency was not abandoned immediately.
But Trump also wants a weak dollar, presumably to help US corporations export more successfully and to report higher earnings in dollar terms. How something can be weak and strong at the same time is classical Trump, emperor-style. At the end of the day I think he is fine with a strong dollar. All his planned policies aim for it. Carpet tariffs imposed on the rest of the world will strengthen the US currency, as it lessens imports and hence the need to sell dollars for other currencies.
Trump, like most Americans, also wants lower interest rates, which would weaken the dollar. But both his planned tax cuts (and the resulting budget deficit, which will balloon even beyond the current, shocking -6.7%) as well as the inflationary impact of tariff-induced, higher import costs, will make sure that US interest rates in 2025 will stay higher for longer; or they may even have to rise again.
In the last five years of inflation fighting, the pronounced interest rate surplus over other currencies has strengthened the dollar against the yen, the yuan, the British pound, and the euro. As inflation has subdued globally and not many countries will feel a need to hike interest rates, the excess returns on US debt over the interest income offered elsewhere will all but guarantee that the dollar will strengthen.
Its strength is compounded by the exceptional vigour of the US economy and its stock markets. Only a shock to the economy, and hence a sudden escalation in unemployment figures, may alter the picture.
A reader recently asked my opinion about the possible demise of the US dollar as the world’s dominant reserve currency. Financial pundits philosophise about this at great length. The question refers to our dissatisfaction with a dollar-dominated world and to the reasons for and against a possible reversion of dollar dominance.
The paramount importance of the dollar in foreign exchange and debt markets and its role in international trade stems from its size. An estimated 88% of currency trade takes place in dollars, and 75% of all $100 notes are used outside the US.
It is easy to find a price of a currency expressed in dollar terms, but may be nigh impossible to figure out how many Mongolian Tugrik should be exchanged for a Thai Baht. The Soviet planning bureau Gosplan, dictating production and consumption in a planned manner, used to joke that without Western market prices it would have a hard time to evaluate the correct price for a pair of nickers. The same holds true for rarer used currencies. All currencies have a price in dollars. To calculate exchange rates, most currencies have to be expressed in dollar terms first.
As a matter of convenience, most commodities are therefore traded in USD. Oil, metals, cocoa, to name but a few. The dollar is used for 50% of all foreign trade invoices globally.
The dollar also dominates international debt markets. No other debt market can match the size, liquidity and low transaction costs of dollar debenture. In the beginning it was hoped the euro could become a valid alternative to the dollar. After its introduction in 1999 it quickly overtook other reserve currencies like the yen, the British pound, or Swiss Franc. Yet the absence of a pooled capital market, a common fiscal authority and a homogeneous banking system hampered the role of the European currency. In the Global Financial Crisis, stressed by internal inconsistencies, the euro even threatened to fall apart. Countries sharing the new currency proved to be on their own.
Many countries therefore prefer to raise capital in dollars, instead of their own, domestic currency. Saudi Arabia, Turkey, and even China raise debt in USD. An estimated 58% of all foreign currency reserves, held by central banks, institutions and corporations, are denominated in dollars. The reasons often quoted in academia are the reliability of the US rule of law, the independent Federal Reserve, and a system of democratic checks and balances, giving assurance to the safety of reserves and savings. They point to China, the second biggest economy on earth as an example, where capital controls and the overriding will of the Chinese Communist Party devalue property rights and hence the safety of deposits, diminishing the attractiveness of the yuan as a reserve currency.
While China quite clearly does not look like a safe haven for our piggy banks, the merits listed for the US markets are eroding quickly. The independence of the Federal Reserve is threatened by Trump, raising the risk of untamed inflation; checks and balances are intentionally eroded, and the rule of law is in danger to be moulded according to political wishes. International laws are applied selectively, only when convenient. Yet the dollar will remain without alternative as long as other currencies suffer their own, greater weaknesses. One of it is size.
On the face of it, the US does everything to destroy the reserve status of the dollar. Sanctions and embargoes are proliferating, damaging friends and foes alike. US policies, wishing to punish individuals, businesses and sovereign countries, are often erratic, hard to justify, painful to accept and impossible to predict. They accumulate over time.
The reach of US sanctions is extraterritorial due to the dominance of the dollar. Market participants will self-censure out of fear. Nobody wishes to be forced out of the most used currency on earth. When Trump exited the Iran Accord, Europe as a signatory tried to salvage trade with Iran within the framework of the accord. Not much came out of it. No bank or company was willing to evoke the wrath of US authorities. Europe tried to develop a single purpose vehicle to facilitate trade with the mullahs. A barter of Iranian pistachios against prosthetic limbs was abandoned.
When whole payment systems like SWIFT are weaponised, banks censured and assets expropriated by the US, it is understandable that alternatives are examined how to best cut the shackles of an overweening bully. Countries opposed to US aggression unleashed from international norms will resort to bilateral trade agreements in their own currency, to barter or hold their reserves in gold as is increasingly the case. Yet these are only incremental measures, insignificant in size.
Alternative means of payment like digital tokens may convenience criminal activity, but offer no alternative to evade US control. As the international order is coming apart in its seams, chaos, fear and war will only cement the importance of the US dollar as the only safe haven there is.
Andreas Weitzer is an independent journalist based in Malta.