Written by Paritosh Bansal
(Reuters) – The United States is working to reduce the pillars that support the dollar as the world's reserve currency, and the latest blows came from some powerful Americans who question the rule of law after the conviction of Donald Trump.
In doing so, it is effectively challenging the rest of the world to find an alternative – and so far, it seems to be winning.
The attacks on the legal system following the conviction of former President Trump come on the heels of other moves that some see as throwing down a gauntlet to the rest of the world.
The country has radically increased the use of sanctions as a punitive foreign policy tool. It adds a huge amount of debt, leaving hapless foreigners seeking the safety and depth of its markets to finance its excesses.
Over the past three weeks, I've been asking financial services executives, global investors, and other experts in Asia and the United States how long they think Americans can go without real blowback. Several sources requested anonymity to speak frankly about the situation.
These conversations showed that panic was growing, both at home and abroad, about the consequences of US arrogance. But despite the attempts, no one has yet been able to find a credible alternative or expect one to emerge anytime soon, and they are partly to blame.
In Asia, for example, people are increasingly asking about “America Plus 1,” as they look for ways to reduce their exposure to the United States and boost non-dollar trade flows.
But attempts to build such systems have been slow or have not gained acceptance. Rising authoritarianism, threats to individual and property rights, and geopolitical tensions meant that even if US assets became less attractive than they had been before, other options became worse.
For example, a recent survey showed that central bank reserve managers plan to increase their dollar holdings over the next 12 to 24 months, as rising global geopolitical tensions and the need for liquidity attract them to the currency.
“Perhaps ironically, the strength of the US dollar is due in part to its almost unchallengeable safe-haven status,” said Steve Hanke, a professor of applied economics at Johns Hopkins University, who served on former President Ronald Reagan's council. Economic advisors. “However, most investors do not understand the geopolitics and risks lurking beneath the surface – until it is too late.”
Dollar dominance
The dominant role that the dollar plays in the world derives, at its core, from the democratic principles espoused by the United States. It is supported by the sheer size of its economy, the depth of its markets, and the strength of its institutions and the rule of law.
The belief in democracy is deep. Last week, I asked SEC Chairman Gary Gensler, who has been in government since 1997, whether partisan politics had made the job of officials like him more difficult. The conservative-leaning US Court of Appeals had overturned one of his signature initiatives that morning.
“I believe in this constitutional system that we have. It's messy,” Gensler said. “It's democracy.”
However, the chaos is testing some of the foundations of the dollar's global appeal.
Attacks on the American legal system increased after Trump was sentenced in a New York court. For example, Florida Governor Ron DeSantis described it as a “kangaroo court” on the social media platform
A major Asia-based investor said potential threats to US institutions were also a cause for concern. Any reduction in the Fed's authority – as Trump's allies think – would affect the dollar's credibility, the investor said, adding that such a development could lead to a double-digit decline in the value of the currency.
Trump's campaign for the Republican presidential nomination has downplayed such reports about what conservative groups might be planning.
A forest of sanctions
One senior financial services executive in New York, who was traveling in Asia, said he hears from clients who believe US and Western financial policy is “undermining the dollar and the Western financial system more broadly.”
He cited the “ever-increasing array of sanctions” as one reason.
The West pushes this circumstance even further. The financial official said that discussion about the West potentially seizing about $300 billion in Russian sovereign assets blocked over Ukraine undermines the safe haven status of the United States. “The West has crossed the Rubicon there,” the executive said.
The Treasury Department's October 2021 review of sanctions found that such designations had increased to 9,421 by that year from 912 in 2000. It noted at the time that “America's adversaries — and some allies — have already begun to reduce” their use of the dollar.
An Asia-based investor said he was closely watching another court case to test the strength of the rule of law: ByteDance's challenge to the US ban on TikTok. He is monitoring the evidence the US government will produce to support claims that the app poses a threat to national security.
If no evidence is presented publicly, the investor said, then “we will feel that the checks and balances, the independence of the legal system, may not be there – at least in this case.”
But then he added that even that might not keep him away from the United States. He said it was still more independent and better than many other places.
