No alternative in sight to dollar as global reserve currency
Trump may take the United States' currency down the same rabbit hole he accuses Beijing of burrowing into, unsettling the global trading system
For a guy who despises China, proving it one tweet at a time, Donald Trump sure does like borrowing from Beijing’s playbook. Take the US president’s assault on the free press, a maneuver in the grand tradition of leaders from Mao Zedong to Xi Jinping.
Or Trump’s ploy to build a great wall of tariffs around an increasingly uncompetitive economy. He also is getting into the state subsidy game – $12 billion of aid to farmers.
Now Trump is taking a page from the Beijing policy that’s long irked him the most: currency manipulation.
It started on the campaign trail in 2016, when Trump complained ad nauseam that weak Asian currencies are “killing us.” After one year in office, in January 2018, Treasury Secretary Steven Mnuchin formally declared dead the 23-year-old strong dollar policy.
Things have intensified in recent days. First, Trump complained that undervalued Chinese and European currencies were taking advantage of Washington. “China, their currency is dropping like a rock,” he told CNBC. “Our currency is going up. I have to tell you, it puts us at a disadvantage.” Europe, he said, is “making money easy, and their currency is falling.”
Then, Trump began slapping his hand-picked Federal Reserve chief, Jerome Powell, for raising interest rates. The message for Powell’s team is clear as it heads into a two-day policy meeting ending August 1: tread very carefully. Not since President George H.W. Bush’s day in the early 1990s has a US leader meddled so blatantly with central bank policy.
The dollar matters to more than Americans
President Xi could be excused for branding Washington a bad currency actor – a charge Trump endlessly heaps on Xi. Are global markets ready for the White House to actively sabotage the world’s reserve currency?
For decades, the dollar has been the linchpin of the post-Bretton Woods monetary system. Since 1995, back when Bill Clinton was president, traders learned to trust a stable dollar as it was in America’s best interest. That remained the conventional wisdom during eight years of George W. Bush and another eight of Barack Obama.
Enter populist Trump, who smells economic victimhood at every turn. Yet two things can be true at the same time. Yes, China has masterfully harnessed World Trade Organization rules since 2001 to increase its market share and influence. It’s also true, though, that the US benefits enormously from a WTO-centric system of its own design.
Trump’s threats to leave the WTO are making Xi’s year. Beijing is still celebrating Trump’s withdrawal from a Trans-Pacific Partnership that had, as one of its goals, containing China’s rise. Trump pulling out of the Paris climate deal and violating the Iran nuclear pact left China looking downright virtuous.
The big risk
But Trump’s desire to devalue the dollar – and by extension, global trust in US debt – could shoulder-check the global trading system.
There are no alternatives. China’s yuan isn’t ready to fill the void. Nor is the euro, backed by a currency union that rarely seems more than a year or two away from crisis. The yen? Not with the Bank of Japan engaged in a decades-long race to the bottom on interest rates.
Trump seems aggrieved that everyone uses the dollar and US Treasuries as safe havens – seemingly for free. Maintaining reserve status, after all, means Washington must run a permanent current-account deficit. What Trump misses is how much Washington benefits from top-dog status. It means the dollar isn’t subject to the normal rules.
If the US didn’t print the linchpin currency, rating agencies would’ve tripped over themselves to downgrade Washington after a $1.5 trillion tax cut the economy doesn’t need. Such epic fiscal irresponsibility, exacerbating a $20 trillion national debt, gets a pass. America maintained its two remaining AAA ratings.
That might change as Trump takes the dollar down the same rabbit hole he accuses Beijing of burrowing into. America’s challenges have very little to do with the dollar. The problem is high wages that are no longer backed up by ample innovation or productivity gains. China’s factories are now far less of a threat to American workers than automation and advances in artificial intelligence.
The more Trump treats the symptoms of waning US competitiveness, the more his legacy will be making China great at the expense of the dollar’s credibility.