Will the faith in the US dollar come down?

Most policymakers consider preserving the value of their currency as an important consideration. To many, it can become the paramount consideration when times are tough. But to US policymakers, it seems that there is a death wish when it comes to the US dollar.

Why do we say this? In the Standard Bank’s view, there are a number of ways in which US policymakers have acted, but there is a lack of consideration for the US dollar. These ‘self-destructive’ actions include protectionism, using the US dollar as a weapon to punish others, the lack of budgetary discipline, and a reticence when it comes to a central bank digital currency (CBDC). To these, we might add challenges to Fed independence, even more punitive tariffs, an even bigger budget deficit and even actions to try to weaken the US dollar, should former president Trump win a second term on November 5^th.

In short, we seem to live in a world where many want to hold US dollars while, all the time, policymakers act to undermine it. Take protectionism, for instance. There is no clear evidence that it helps US trade while, at the same time, it potentially undermines the dollar as a vehicle currency for trade if other countries are forced to trade between themselves rather than with the US.

Given Trump’s plans for an across-the-board 10%-plus tariff, with a special 60%-plus rate for China, it looks as if any new Republican administration could play even faster and looser with the US dollar’s ‘special’ status. When it comes to US dollar weaponisation, we have already witnessed US action to restrict other countries access to the greenback, with Russia being the most notable. And, as we’ve seen already, these countries respond by ditching dollar reserves, where possible, and migrating to other currencies, such as the Chinese renminbi.

Trump has threatened to outlaw a Central Bank Digital Currency (CBDC) on privacy grounds but, even leaving aside Trump’s concerns, there is a degree of caution towards CBDCs in the US that we don’t find elsewhere. Many US officials argue that the lack of a US CBDC will not undermine the use of the dollar or its value, but we are not so sure.

Another apparent ‘death wish’ relates to the budget. For while we hear many other governments argue that deficit reduction is paramount, there is barely a mention made of the issue in the US political debate. For instance, new UK PM Starmer warned yesterday that tough fiscal decisions lie ahead; you won’t hear the same from the main political players in the US and, more to the point, even if the presidential candidates put deficit and debt reduction at the forefront of their campaigns, there’s little reason to believe that a dysfunctional US Congress will be able to effect the deficit consolidation that’s so badly needed.

A recent study suggested that the special status of the US dollar (the US’s exorbitant privilege) allows the US to run a sustainable debt/GDP ratio that is 22% points higher than other countries could hope to achieve. That’s a huge advantage but one that seems as if it is being thrown away. It could be jettisoned even faster if Trump returns and focuses his ire on Fed independence and the strong dollar. It might melt away even faster if he loses and provokes civil disobedience by claiming that a second election victory has been stolen from him.

In sum, we seem to have a US dollar that is resilient based on its past domination of things like trade invoicing, international lending, reserve currency status, safe-haven properties and more. The US has taken advantage of these to rack up huge debt. So far, financial markets have retained faith in the US dollar, even though it seems that US policymakers have undermined this faith with things like protectionism. There is no imminent sign that global financial markets are losing this faith, but, in the Standard Bank’s view, if things don’t change, this faith will be lost at some stage and the US dollar will suffer for it.