In the Market: How the US is daring the world to find a dollar
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[June 10, 2024] By
Paritosh Bansal
(Reuters) -The United States is merrily chipping away at the pillars
that hold up the dollar as the world's reserve currency, with the latest
blows coming from some powerful Americans questioning the rule of law
following the conviction of Donald Trump.
In doing so, it is effectively daring the rest of the world to find an
alternative - and so far, it appears to be winning.
The attacks on the legal system in the aftermath of former President
Trump’s conviction follow other moves that are seen by some as the
United States throwing down the gauntlet to the rest of the world.
The country has radically increased the use of sanctions as a punitive
foreign policy tool. And it is adding on an immense amount of debt,
leaving hapless foreigners who seek the safety and depth of its markets
to fund its excesses.
Over the past three weeks, I have been asking financial services
executives, global investors and other experts in Asia and the United
States how long they think the Americans can keep at it without
meaningful blowback. Several of the sources requested anonymity to speak
candidly about the situation.
These conversations showed consternation is growing, both at home and
abroad, about the consequences of U.S. hubris. But despite trying, no
one so far has been able to find a credible alternative or expects one
to emerge anytime soon, and they have partly themselves to blame.
In Asia, for example, people are asking with increasing urgency what's
their 'America plus 1', as they search for ways to reduce their U.S.
exposure and boost non-dollar trade flows.
But attempts to build such systems are slow-going or haven't gotten
traction. And rising authoritarianism, threats to individual and
property rights and geopolitical tensions have meant that even if U.S.
assets are less attractive than they were before, other options are
worse.
A recent survey, for example, shows central bank reserve managers plan
to increase their dollar holdings over the next 12-24 months as the rise
in global geopolitical tensions and need for liquidity draw them to the
currency.
"Perhaps ironically, the U.S. dollar's strength is, in part, due to its
near-unchallenged safe-haven status," said Steve H. Hanke, a professor
of applied economics at Johns Hopkins University, who served on former
President Ronald Reagan's Council of Economic Advisers. "That said, most
investors don't understand geopolitics and the dangers that lurk below
the surface – until it's too late."
DOLLAR'S DOMINANCE
At its core, the dollar's dominant role in the world draws from the
United States' democratic principles. It is supported by the massive
size of its economy, the depth of its markets, and the strength of its
institutions and the rule of law.
The belief in democracy runs deep. Last week, I asked U.S. Securities
and Exchange Commission Chair Gary Gensler, who has been in government
since 1997, whether partisan politics had made the job of officials like
him harder. A conservative-leaning U.S. appeals court had struck down
one of his signature initiatives that morning.
"I believe in this constitutional system that we have. It's messy,"
Gensler said. "It's democracy."
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U.S. Dollar banknotes are seen in this illustration taken July 17,
2022. REUTERS/Dado Ruvic/Illustration/file photo
Nevertheless, the messiness is testing some of the underpinnings of
the dollar's global appeal.
Attacks on the U.S. legal system have increased after the Trump
verdict in a New York court. Florida Governor Ron DeSantis, for
example, called it a "kangaroo court" on the social media platform
X, saying "the verdict represents the culmination of a legal process
that has been bent to the political will of the actors involved."
A major investor based in Asia said potential threats to U.S.
institutions were also worrying. Any debasing of the Federal
Reserve's authority -- as Trump allies are reportedly contemplating
-- would affect the dollar’s credibility, the investor said, adding
that such a development could see a double-digit depreciation of the
currency.
Trump's campaign for his Republican presidential bid has played down
such reports of what conservative groups might be planning.
THICKET OF SANCTIONS
A senior New York-based financial services executive who was
traveling in Asia said he is hearing from clients who think the U.S.
and Western financial policy is "undermining the dollar and the
Western financial system more broadly."
He pointed to an "ever expanding thicket of sanctions" as one
reason.
And the West is pushing the envelope further. The financial
executive said the discussion that the West might seize some $300
billion of sovereign Russian assets that were blocked over Ukraine
undermined the United States' safe haven status. "The West crossed a
Rubicon there," the executive said.
An October 2021 Treasury Department review of sanctions found such
designations had increased to 9,421 by that year from 912 in 2000.
It noted at the time that "American adversaries — and some allies —
are already reducing" their use of the dollar.
An Asia-based investor said he was watching another court case
closely to test the strength of the rule of law: ByteDance's
challenge of a U.S. ban on TikTok. He is watching for the evidence
that the U.S. government would produce to back up claims of the app
being a national security threat.
If no proof is publicly offered, then it would "feel that the checks
and balance, the independence of the legal system, may not be there
-- at least in this case," the investor said.
But then he added that even that may not turn him away from the
United States. It's still more independent and better than many
other places, he said.
(Reporting by Paritosh Bansal; Editing by Anna Driver)
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