Will the US dollar face competition from cryptocurrency?

He insisted at the time that the US dollar should remain the currency of the world. Fast-forward three years and Trump’s Damascene conversion has seen him embrace crypto wholeheartedly. Does this mean increased competition for the US dollar; something that could ultimately crimp the US dollar’s use, and perhaps its value as well?

The two biggest currency moves in the wake of the November 5^th election have been strength in the US dollar and strength in crypto currencies such as Bitcoin. That’s unusual as most often, these two currencies move in opposite directions. That’s not just because the US dollar is the world’s currency, which means that it tends to rise against all currencies at the same time or fall against all currencies at the same time, including Bitcoin. It is also because policies that seemingly undermine fiat currencies, such as quantitative easing, work to the benefit of ‘currencies’ that are in more restricted supply, like Bitcoin. Hence, US dollar weakness on this basis might conceivably be associated with Bitcoin strength.

On the other side of the equation, we still see episodes when global risk aversion rises sharply and suddenly, pushing the US dollar higher while weighing on ‘riskier’ assets – which usually includes crypto currencies. The question from here, therefore, is whether the US dollar and crypto currencies can continue to rally and, if not, which one will fold?

Another question, which might be more pertinent, is whether strength in one could undermine the other. We’re thinking here about Trump’s crypto currency comments from 2021. If crypto currencies are “competing” against the US dollar, and if Trump is now encouraging this competition, will the US dollar lose influence, and could this undermine its value?

Steve Barrow, Head of Standard Bank G10 Strategy said that most would say ‘no’ to this. Crypto currencies are not just too small to challenge the US dollar and can never become a true challenger whatever crypto legislation the new administration comes up with. For the most part we’d go along with this scepticism. However, there are a couple of other things to bear in mind here.

One is that, while Trump seems to want the dollar to continue to dominate, he does not necessarily associate this with dollar strength. Indeed, if his first term is anything to go by, he will spend his second term trying the jawbone the dollar lower. His efforts between 2017 and 2021 did not seem to send the dollar into a tailspin, but if any renewed attempt now to talk the US dollar down are accompanied by efforts to promote an ‘alternative’ to the dollar – crypto – it could be a different story.

There is also a second issue here, which is that Trump could conceivably undermine the dollar by outlawing Federal Reserve development of a Central Bank Digital Currency (CBDC). Now it is debatable whether development of a CBDC can lift a currency’s use, let alone its value. Many in the US seem to have reservations about CBDCs even without Trump’s involvement and it has never been clear whether the Fed would introduce a digital currency anyway.

Nonetheless, to the casual observer, there’s something of a division going on here between Trump promoting the unregulated crypto market while, at the same time, other governments and central banks around the world go down the more official route of developing CBDCs. In the end, neither might be particularly successful, but if they are, it does rather suggest that the dollar could be squeezed between crypto and CBDCs and that could come at a cost to its usage and its value.

“The issues discussed here seem factors that might have a bearing on things like the value of crypto and the dollar over the long haul. But there is still the short-term question about whether the simultaneous rise in the dollar and crypto currencies since the election can continue or, if not, which one will break first. Much here will likely depend on the details of the policies towards crypto, tax cuts, tariffs etc that Trump adopts. Until we get clarity the pair may continue to strengthen arm in arm”, said Steve Barrow.