Former US president Donald Trump’s strategy for re-election 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 are not. Crime, he asserts, is way up. It is 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 US 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 percent tariff on your goods,” he said.
The implication, like most things Trump says these days, is that only he can prevent such a calamity. Make no mistake, it would be a calamity if it were truly happening — but it is not. The US dollar is the world’s primary reserve currency, which is the source of the US’ “exorbitant privilege,” and 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 US 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 US 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 last year, 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, Bloomberg News reported.
It would not be an easy task. Since Russia invaded Ukraine in February 2022, use of the US dollar in global transactions has only grown, jumping from 38.9 percent to 47.8 percent as of July, said SWIFT, the member-owned cooperative that provides financial messaging services to more than 10,000 institutions and corporations in 210 countries. One decade ago, the US dollar’s share was less than 35 percent. Clearly, the world sees a benefit in transacting business in a currency where the rule of law takes precedence.
It is 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 US$1.14 trillion since the end of 2020 through June, better than the US$1.07 trillion under all four years of Trump. It is why the Bloomberg dollar index has increased 10.2 percent under the administration of US President Joe Biden after weakening 11.6 percent under the Trump administration. It is why the MSCI USA Index of equities has surged 42 percent since the end of 2020, almost 17 times the gain of the MSCI All-Country World Index excluding the US.
What Trump conveniently neglects to mention when it comes to the US dollar is how much damage he did to it while president. Erratic and unpredictable policies, domestic and foreign, along with periodic threats on the ideals that underpin the rule of law created a crisis of confidence in the US as a stable place to invest. The US dollar’s share of global currency reserves tumbled from 65.4 percent when he took office in 2017 to 60.7 percent when he left at the end of 2020 — which was the lowest since 1995. Under Biden, the US dollar’s share has stabilized, amounting to 58.9 percent at the end of the first quarter.
Even so, Trump’s “100 percent tariff” plan on countries that shun the US dollar contains a fatal flaw.
It is possible that such prohibitive tariffs could have the opposite of their intended effect and drive countries away from the greenback, threatening the haven status of US Treasuries and “lead to massive dollar weakness,” Commerzbank AG foreign exchange research head Ulrich Leuchtmann said on Monday.
Trump wants to “force [US] dollar dominance. That changes everything,” Leuchtmann said.
“If the US were to impose prohibitive tariffs across the board, they would cause massive disruption to the global economic system,” he said.
Like Don Quixote, who attacked windmills in the mistaken belief that they were wicked giants, Trump is known for assailing imaginary enemies or evils. 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.
Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.
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