The Selling of America: Ending the US Dollar’s Exorbitant Privilege

Has the love, or even more so the fixation, gone with the US dollar, that all cushioning reserve currency that has shown itself unimpeachable for decades? A curious event teasing and ruffling currency watchers and financiers is becoming a pattern: the US dollar is being sold off, suggesting it has lost its princely shine. To this can also be added the sale of US Treasuries.

Even before the global imposition of Donald Trump’s tariff-driven bonanza and his public bruising of Federal Reserve chairman, Jerome Powell, the world’s dominant currency was already being moved on. Since 2014, the Chinese and Russian central banks have tried to move out of US Treasury holdings, preferring the magic of gold. In 2022, the latter went so far as to link its currency, the ruble, to gold.

For all that, something far more dramatic would be needed to upset the status of the dollar, and certainly the authority of its “exorbitant privilege”, to use that apt term coined in the 1960s by the then French Minister of Finance, Valéry Giscard d’Estaing. Only “serious economic and financial mismanagement by the United States,” proposed economics professor Barry Eichengreen in 2010, “could precipitate flight from the dollar.”

In the autumn leading to the 2024 presidential election, there was little to suggest any such flight. The dollar had markedly appreciated, boosted by the statistical astrology of US economic growth. This continued after Trump’s victory in November. The promise of a vigorous tariff policy, one potentially inflationary, also charmed investors keen to make greater returns from their dollars, assuming a raise of interest rates by the Federal Reserve.

The tariff policy well and truly arrived on “Liberation Day” (April 2), proving to be erratic, arbitrarily derived and often economically illiterate in application. The precipitated fall of the greenback shocked the currency pundits. “For several years, the market’s been buying this US growth story, the US stock market’s been outperforming other stock markets, and suddenly you had economists thinking tariffs would push the US into recession,” remarks Jane Foley, head of foreign exchange (FX) strategy at Rabobank. Additionally, the tariff regime has encouraged countries with current account surpluses denoted in US assets to consider returning them back to domestic markets, something that will further weaken the dollar.

Trump has also lost patience with Powell, petulantly ventilating on Truth Social that the Federal Reserve chair impose pre-emptive cuts to interest rates, given the White House’s own assessment that the US faces no inflation. There would be, declared Trump in a post, a “SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW.” While Europe continued to lower its rates, Powell had proved himself slow on the draw, “except when it came to the Election period when he lowered in order to help Sleepy Joe Biden, later Kamala, get elected.”

In the angry mist, the President floated the possibility that the central banker might be removed. His “termination” could not “come fast enough.” He also charged his advisors to distribute poisoned packages of speculation as to what he intended to do with the recalcitrantPowell. White House National Economic Council Director Kevin Hassett obliged, telling reporters that, “The President and his team will continue to study that matter [of removing Powell].”

Then, in true seesaw fashion, the President claimed the opposite of what he meant, a move that also sent the market into another galloping spree. “I have no intention of firing him,” Trump told reporters on April 22. “I would like to see him be a little more active in terms of his idea to lower interest rates.”

In the tumult of it all, investors are scouring other havens, shunning the status quo and traditional sensibility of the dollar. The Japanese yen and Swiss franc are returning to favour. As is the euro. While an economist’s word should never be taken as gospel, chief currency analyst at ForexLive, Adam Button offers his view: “The market wants to invest in the fastest growing places, and the US administration is showing that it is not trying to maximize growth, or they have a different idea about how to get there. And I think that’s rattled the market.”

Curious events are unfolding as a result of Trump’s carnivalesque approach to trade and markets. While the value of the greenback has fallen, the returns from 10-year US government bonds have risen. This is the sort of thing common in new, emerging markets, where capital is susceptible to flight amidst conditions of volatility. In the US, this is the fifth time it has happened in three decades. Even with the rise in bond yields, the dollar’s slide has not been arrested.  

For the easily panicked, a particular safe haven – and one already identified by central bankers and investors – is gold. With US government debt no longer attractive for traders, the yellow metal has outperformed most major assets with its giddying rise. Having passed $US3,500-an-ounce on April 22, the favouring of gold is merely one aspect of a market narrative that has turned the Trump Tariff Wall into the Selling of America.  

Crystal ball gazing is a mug’s game in economics, but countries wishing to see the defanging of dollar diplomacy and greenback bullying long used by Washington to maintain power will see flashes of opportunity. The dollar’s privilege may no longer be exorbitant.

 

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