Even though there is a lot of worry about its possible demise, the U.S. dollar is still the most important coin in the world. A London-based currency analyst said Thursday that the currency’s strength may not be because of what U.S. officials have done, but because of them.
“Maintaining the value of their currency is an important issue for most policymakers.” “When times are tough, it can become the most important thing to many,” wrote Steven Barrow, head of G-10 strategy at Standard Bank, in a note.
“But it looks like U.S. policymakers want the dollar to die,” he wrote.
Protectionism, using the dollar DXY 0.38% as a tool to punish others, not sticking to a budget, and being hesitant to accept a central-bank digital currency, or CBDC, were some of the things that Barrow said were “self-destructive.”
Not only that. He also said that challenges to the independence of the Federal Reserve, the possibility of even harsher tariffs, even bigger budget deficits, and actions that could completely weaken the dollar if Republican Donald Trump wins the Nov. 5 presidential election over Democratic Kamala Harris are all parts of the picture.
He said that there’s no clear proof that protectionist policies help U.S. trade, but they hurt the dollar if other countries have to trade with each other instead of the U.S. As Trump wants, all goods should be taxed at a rate of 10% or more, and China should be taxed at a rate of 60% or more. This would make the dollar go “even faster and looser.”
When it comes to making weapons, the U.S. has limited some countries’ access to the dollar. Russia is the most famous example of this. Barrow said that the reaction has been for countries that were being targeted to get rid of their dollar reserves and move their money to other currencies, like the Chinese renminbi USDCNY -0.11%.
He also said that U.S. policymakers are much less sure about CBDCs than policymakers in other countries.
Barrow said that the U.S. political debate doesn’t talk much about the deficit, while this week in the U.K. Prime Minister Keir Starmer warned that tough fiscal choices are coming.
Barrow talked about a new paper that said the U.S. can have a debt-to-GDP ratio that is 22 percentage points higher than other countries because of the dollar’s unique position.
He said, “That’s a huge advantage that seems to be being lost.”
Barrow says that the dollar’s strength may come from the fact that it has historically been the most important currency for trade, foreign lending, acting as a safe haven during times of trouble, and other things. He said that the U.S. has racked up a lot of debt by taking advantage of the dollar’s position, while financial markets have stuck with the dollar.
As Barrow wrote, “there aren’t any immediate signs that global financial markets are losing this faith. But we think that if things don’t change, this faith will be lost at some point, and the dollar will suffer for it.”
