aOf the global fallout from Donald Trump’s “Liberation Day” tariff announcement, it appears to be nowhere safe. Stock crashes, bond and currency disruptions will wipe out trillions of dollars of wealth in just a few days.
On Friday, the dollar fell more than 1% compared to baskets of other currencies, reaching its lowest level in three years, exacerbating almost 10% of its slide from the beginning of the year. Over the course of a week, I lost about 3 cents against the pound and 4 cents against the euro.
The president’s partial U-turn (even after the freeze tariffs on all US imports except for 90 days were frozen for 90 days) raised the markets to fresh defeats from relief rally, just as investors questioned they were once unthinkable.
“The damage has been done,” said George Saravelos, head of foreign exchange research at Deutsche Bank. “The market is undergoing a rapid process of decooperative reassessing the structural appeal of the dollar as a global reserve currency.”
Unlike typical market sales, Trump’s clash includes US stocks, government bonds known as the Treasury Department, and dollars that lose the value of the same period. That’s unusual because investors usually cultivate dollars and Treasury bonds during periods of uncertainty and financial distress.
For the past 80 years, the dollar has held its position as the world’s leading reserve currency. It is used as a valuable storage worldwide, as grease on the wheels of the financial system, and as a medium of exchange for trade.
The belief is that government-backed currencies, sitting at the top of the world’s outstanding economy, are about as good as things as the deepest capital markets, the strongest military, and the political system that respects the rule of law.
But Trump is changing everything, slaps punitive tariffs on traditional US allies and enemies.
Ragram Rajan, former governor of the Reserve Bank of India and former chief economist of the International Monetary Fund, said the currency crisis was attributed to investors’ concerns about the US economy and changes in Trump’s volatile policies.
“There is concern about how unstable and unpredictable US policies have become, and the US is increasing the fear that if high levels of tariffs remain, the US is heading for a recession,” he said. “(However) of course, customs policies seem to be a moving target.”
As investors usually use it as a “risk-free” benchmark to determine the price of all other financial assets, a sudden loss of trust is becoming severe in the US Treasury market, widely considered to be the most important in the world.
In its most rapid weekly movement since 1982, 30-year US government bond yields – effectively increased interest rates from around 4.4% to 4.8%. The yield on bonds over the past 10 years has also risen.
Investors say a lot is going on. While clear confidence is brewed, the turbulence of the US dollar and the Treasury reflects the potential economic damages that Trump’s policies bring. Includes the probability that the US recession and the Federal Reserve could cut interest rates from 50 to 50.
Amid a wider market defeat, where more than five tons (£3.8tn) was cut from US stock prices, bond sales reflect hedge funds rushing to sell Treasury to reduce risky transactions, with investors roaming cash.
“I think Trump’s trade views are stupidity and insanity. He’s going to harm the US economy and caused unnecessary crisis,” said Mark Sobel, a former US Treasury employee who is now a civil servant at the US Treasury Department, who is a central bank think tank.
“My basic paper is that the dollar will remain the dominant global currency for the foreseeable future, as there is no viable alternative. But I think Trump will undermine the basis for what has created dominant dollar by weakening America’s economic and institutional foundations by not being a reliable partner.
“His actions over the past week clearly accelerated the erosion of dollar control and caused more market volatility worldwide.”
Figures compiled by the IMF show that the US dollar is the reserve currency of choice in countries around the world, accounting for almost 60% of the world’s forex reserves. The euro is about 20%, in a distant 2 seconds, followed by the Japanese yen at almost 6%. Sterling – the global reserve currency before the US ruled after World War II – accounts for about 5%.
Sobel said there has been a recent increase in Canadian and Australian dollars, Swiss franc and yen usage. The euro was hardly based, but the Chinese yuan, supported by a communist government and relatively closed to the wider world, still has no global favor.
However, some within the Trump administration see the dollar’s status as a repulsive international reserve currency, and sees another sign of the world as free from the United States.
The president has long wanted weaker dollars, with the idea that it would help make American goods cheaper for overseas buyers.
Steven Milan, chairman of the Economic Advisors Council, proposed a plan similar to the 1985 Plaza Accord, what is called the “Mal Lago Accord,” after Trump’s Florida residence, when the US agreed to depreciate the dollar to Japan, the UK, West Germany and France.
Usually, when imports exceed exports, trade deficits are flawed over time, as the trade deficits create pressure below the country’s currency (as a result of demand beyond the foreign currency of the domestic currency). However, the US “exorbitant privilege” above the world’s reserve currency – guaranteeing dollar demand – has enabled countries to carry out a sustained trade deficit since the 1970s.
Many economists have little problem with this. If the consumer benefits from cheap imports.
There is also fear among investors that the US can pursue a strategy that forces them to pay the “exorbitant privilege” of using the dollar as a reserve currency. But it will cause serious damage to the global economy and further undermine trust in the dollar.
“The world should be prepared (for this),” said Karsten Junius, chief economist at J Safra Sarasin Sustainable Asset Management. “We believe that when quarantining China, it is likely that the US will try to combine priority tariff treatment on countries following the US, market access and financial infrastructure.
“Country needs to be on their side. This is especially difficult for European and East Asian countries, which have important ties to both the US and China.”
The EU in particular is considering a contingency plan in response to the uncertain future of the dollar. Jose Luis Escriba, governor of the Bank of Spain and a member of the European Central Bank’s governing council, told the financial era that finance could emerge as a more attractive alternative.
“We can provide a very large economic sector and a robust currency, which can benefit from the stability and predictability that stems from sound economic policies and the rule of law.”
Pascal Lamy, a former EU trade commissioner and former head of the World Trade Organization, said Trump’s trade war could lead other countries to work together more closely.
“The EU is an obvious candidate for bringing together many others. If China does that, it won’t work even if India does,” he said.
“It’s the US crisis. It’s not a global crisis. The US is 13% of global imports. But there’s no reason 87% will be contaminated by these voodoo economics.”
