As President Donald Trump proudly imposes the highest tariffs in over a century, a more delicate debate simmers beneath the surface: Is the US dollar still the world’s safe-haven par excellence, or is it slowly morphing into an emerging market currency?
The jury’s still out. Last week, the greenback took a knock following the White House’s latest volley of punitive trade measures. But as equities plunge and financial anxiety deepens, the usual flight to safety has kicked in, with nervous investors crawling back to the dollar like moths to a flickering flame.
Still, unease lingers. If Trump is truly bent on transforming America into a proudly self-sufficient fortress of tariffs and isolation, do other countries still need to hold on to mountains of dollars? Spoiler: probably not as much as they used to.
The dollar’s global supremacy is already fraying at the edges. According to the IMF, its share of global reserves dropped to 58% last year—down from over 70% at the turn of the millennium. In its place? An eclectic mix of “non-traditional” currencies like the Aussie dollar and, of course, the Chinese yuan. Even reserve managers are embracing diversification.
And imagine, if you will, a world in which free trade carries on—just without the Americans. With modern liquidity systems and algorithmic market makers, trading partners can swap goods in their currencies. Who needs Uncle Sam’s middleman services when the yuan or euro will do?
Another niggling issue: it’s now private investors—not central banks—who are the primary buyers of US assets. That might have supercharged the dollar recently, but let’s not forget that these flows are fickle. Foreigners now hold about $18 trillion in US equities—roughly 60% of GDP, up from under 40% a decade ago. A mere 5% reduction in holdings could double the current account deficit that Trump claims he’s desperate to shrink.
In the olden days (pre-Trump), trade partners earned and stowed dollars from America’s persistent current account deficits. Global asset managers hoarded them, lured by strong growth and S&P 500 outperformance. But those days seem increasingly quaint. Trump is systematically pulling the US out of the global economy, and analysts are now pencilling in a sharp GDP contraction.
And yet, Trump seems wedded to a nostalgic worldview in which foreigners getting rich off cheap exports to the US is a mortal sin. He’s somehow missed that America is, in fact, a net exporter of services—from financial products to cloud computing. And those same foreigners have been buying US equities hand over fist since the financial crisis, subtly endorsing the notion of American exceptionalism. But the president, alas, only sees half the picture.
Perhaps it’s time someone slipped a few modern economics textbooks into the Resolute Desk. Until then, once the undisputed king, the dollar may become collateral damage in this grand protectionist experiment.