Trump’s Misfire of a Weaponized Dollar

Although the US dollar is not the world’s reserve currency, it is clearly the world’s major reserve currency. Valuation and financial metrics are heavily reliant on the perceived stability of the dollar, the underlying legal US system and our institutional capacity to handle the trillions of dollars of transactions that are measured and implemented in global trade. No other economy on earth has that capacity… at least not so far. Many other nations maintain massive foreign currency reserves, most of which are dollar denominated.

 Clearly, the dollar’s visible strength against most other currencies is in significant part attributable to its ubiquitous presence in global trade. The standard bearer for so much of the world’s transnational business flow. 

That status is not necessarily without detriments, however. One of the hallmarks of maintaining the global primary reserve currency reserve is an ability and willingness to deal with account surpluses, but mostly to tolerate account deficits. If you think of holders of US currency as holding little notes from the US government to them, you begin to understand the issue. We owe money! 

Marshall Gittler, FX (foreign exchange) strategist & financial commentator (writing for Quora. Com) gets a bit more technical: “In order to accumulate foreign exchange reserves, [foreign] central banks buy assets (mostly government bonds) denominated in the currencies of other countries. In this case, we have foreign central banks buying billions and billions of dollars worth of US government securities. This causes the US to run a financial account surplus. (A financial account surplus means foreigners buy more USD-denominated assets than US-based investors buy in foreign assets.)

“If the US runs a financial account surplus, by definition it has to run a current account deficit [remember, because we owe money to those holding US currency], unless the government intervenes heavily. The current account is mostly made up of trade in goods & services. (That’s because money coming in has to equal money going out.)

“So the fact that the USD is the world’s major reserve currency is one of the main reasons why the country has run a current account deficit for most of the last 30 years. (This by the way is known as the Triffin dilemma — a dilemma identified in the 1960s by the economist Robert Triffin, who realized that any country that dominated world FX reserves would have a consistent current account deficit that would gradually undermine the value of that currency.)

“To put it in simpler terms, if the USD weren’t the world’s major reserve currency, probably its value would have fallen, US exports would be more competitive, and more people in the US would have jobs making goods for exports. On the other hand, probably fewer people in China, Germany and Mexico would have jobs making things for export to the US. Do you think that’s a good thing or a bad thing? Probably your view on this depends on whether you work in a factory in the US or China.”

But as the owner of that currency, we have a political badge of honor that carries with it more than its share of responsibility. We probably will never mount a balance of trade equilibrium as long as we are the primary reserve currency, but a strong dollar lets us buy foreign goods and services at much more affordable prices, and the less the dollar is used at that primary metric, that primary trading currency, the less relative value it will have. Likewise, our ability to dominate international financial markets and effectively be the power in international trade would be diluted.

Enter Donald Trump. Not only have his erratic economic policies destabilized the perceived value of the dollar in international financial markets, including the stability of the underlying legal system, but his willingness to “weaponize” the dollar through tariff wars and imposing economic sanctions for political goals has provoked a reaction in the two other major economic forces in the world, China and the European Union: unless they want to be beholden to erratic Donald Trump or his successor, they must seriously consider diluting the dollar’s relative power in global markets. 

Somehow, they reason, either their currencies must rise as acceptable alternative primary reserve currencies or a new blended reserve currency, where the dollar is just one of the underlying currencies so blended, must be established. Should either of these alternatives be implemented, you can be certain that the dollar will weaken while the cost foreign goods and commodities (especially oil, even if it is generated from US source) will rise. Ouch!

China has yet to cave to Trump’s trade demands, despite the pain. But when it comes to US domination of international trading standards, we know what China wants. But the PRC needs more exposure buying foreign goods (beyond oil and foodstuffs) and more rigorous financial institutions to qualify. Someday. Not now, although it could use its debt-imposing Belt and Road initiative to force borrowing countries to accept the yuan/renminbi as a primary reserve currency. The European Union, on the other hand, just might have the wherewithal to pull it off, and Donald Trump has so angered the EU that they just might be the ones to tackle the dollar.

Martin Sandbu, writing for the December 9^th Financial Times (UK), explains how European ire just might have lit the fuse for an explosive reconfiguration of the dollar’s status. “It took the whirring sound of the helicopter blades on Marine One to reinvigorate Europe’s determination to no longer be subservient to the U.S. dollar.

“When President Trump took off early from the G-7 summit in Charlevoix, Canada, in June 2018 and abruptly withdrew from a common communique, he left European leaders first ‘speechless, then determined to work together,’ said Martin Selmayr, secretary-general of the European Commission under President Jean-Claude Juncker.

“‘Trump boarding the helicopter in Charlevoix triggered the idea of European sovereignty,’ Selmayr said. ‘Promoting the international role of the euro was one answer to that political moment.’… Just months later, Juncker vowed to make the euro ‘play its full role on the international scene.’ The incoming commission looks eager to pick up the baton: Ursula von der Leyen, the new president, has included the goal of boosting the euro in letters to her team.

“Since the start of the year, the commission has been quietly working to promote the use of the euro in cross-border invoicing, specifically for energy products. A clearinghouse has been created to circumvent U.S. threats to exclude from the dollar system the companies that trade with Iran. And the European Central Bank has been enlisted to communicate the economic consequences of greater euro use internationally.

“As Europe looks warily to the growing competition its main industries face from China and the increasingly erratic leadership of its American ally, the role of the euro has become one of the centerpieces of a profound rethink taking place across the region about how it defends its own interests that include industrial policy and trade.

“For European leaders, a more prominent euro is key to securing the region’s financial and monetary autonomy and protecting it against U.S. attempts to weaponize the dollar through financial sanctions.” Europe is quietly attempting a workaround to allow trading with Iran, as the EU attempts to keep the UN nuclear containment accord intact, that will side-step reliance on the dollar and US-dominated financial institutions. If the entire reserve currency system can be upended, the impact on the United States would be even vastly more substantial.

Further, once such a change is implemented, given enough time to settle down, it is exceptionally unlikely to get undone to restore the dollar to its former lofty position. There may be additional currencies vying for primacy, but the dollar’s primacy will have past. The change might happen slowly, but Trump’s actions seem to be an accelerant.

Like so many of Trump’s missteps in international and economic policies and his erosion of l trust and influence of the US on the global stage, the damage will be permanent. The economic ramifications will impact each and every American. It will not just be our prestige that will drop even lower; it will be the economic quality of life for most of us. The mega-wealthy and international conglomerates can adjust their financial structures accordingly. They can move assets and money as needed. Most Americans cannot.

              I’m Peter Dekom, and the deep anti-intellectualism that dominates the Trump administration and so many of his supporters can cause deep harm to most of us… because there is a failure to appreciate and understand these powerful economic forces which are far beyond Trump’s ability to control, tweets to the contrary notwithstanding.