The Trump administration has positioned the dollar on the key burden pillar of global finance. If it goes, it will miss it very much.
It's still crazy to discuss it all. Over the years, the role of beating drums with the dollar surrendered, as the dominant reserve currency was the niche hobby of crack cakes. Some large investors still insist that the huge dollar will remain here without serious status replacement. Others point out that dollar skeptics are confusing the Bucks’ recent weakness with safe havens and lubricants for global trade.
However, both of these are blind to the scale of security policy and geopolitical disruption, since Donald Trump re-entered the White House. Therefore, it is wise to consider the loss of the US position. The speculation now is that in markets and large politics it will be short-term, less resilient in any crisis that has passed, and more dependent on the kindness of strangers.
Adam Posen has long been one of the heavy economists who have been involved in the matter. Back in 2008, he wrote a paper titled "Why the Euro won't compete with the US dollar" and noted: "The Euro is at the peak of temporary influence, and the US dollar will continue to benefit from the geopolitical sources of its global role, which cannot or will soon be matched (if any).
At the time, Trump was busy opening his last major construction project, the Trump International Hotel and Tower in Chicago. Posen, like the rest of us, is forgiven, because then Trump may become the leader of the free world again in 2025. But we are here.
Now, Posen said in a fascinating online speech last week that the president’s sudden shift in foreign policy poses a direct and serious risk to the dollar foundation. The decline of green has been one thing since Trump announced the so-called countdown tariffs on April 2, which is instinctively understandable, reflecting that our future U.S. growth may be weak. But the fact that the value of long-term government bonds is a completely different story - there is no evidence that the dollar's main reserve currency status has died, but evidence of its injury is reliable.
A key element here is that not all U.S. government bonds are equal. When Trump announces a huge trade tariff explosion market, the short-term treasury will rise for about two years - a typical reflection of the expectations of the shock may require lower interest rates. However, the so-called far-market takes a different path, which is a very unusual quirk, “with new analysis with Viral Acharya and Toomas Laarits of NYU’s Stern University Business School, which is “consistent with the reduction in their safe assets hedging properties.”
In normal times, bonds and currencies are based on growth, inflation and interest rates are higher and lower. But these are not normal times, as we have seen, the obvious foundations of foreign policy and geopolitics form the basis for where all people are. This makes it difficult (not impossible, but difficult) to see how the US dollar and the Treasury use its historic role as a reliable safety valve for the luxury market.
Unless this imbalance between short-term and long-term Treasury resets, it means the U.S. may rely more heavily on cheap short-term debt issuances. Often, the United States is such a determined, safe and reliable borrower that the Treasury effectively affords it to never pay off debts – it can issue new bonds over and over to pay off old ones. More tilt than long term, which means it will be a more frequent task, requiring the United States to keep its creditors sweet to reduce borrowing costs.
The huge privilege of hosting currency and bond markets also means that the United States can borrow trouble, even local trouble, and it is easier to borrow problems than any other country. Historically, it kept the crisis short of a shortage by leveraging reliable investments at reasonable costs and stimulating its nearly liberal solutions than other countries, which often sees their borrowing costs rising in times of hardship.
The new U.S. government may think that's how the world works. This is understandable, but don't be taken for granted, Europe will love that kind of magic.
Safe assets are safe because everyone thinks they are safe. The United States is in the process of determining the long-term cost of breakdown.
katie.martin@ft.com