THE United States is persistently undermining the pillars supporting the dollar’s status as the world’s reserve currency. Recent developments, including powerful Americans questioning the rule of law following Donald Trump’s conviction, have exacerbated the situation. These actions are effectively challenging the global community to seek alternatives, yet the dollar remains unchallenged for now, according to a report by Reuters.
The fallout from Trump’s conviction adds to a series of aggressive moves by the U.S. that signal a readiness to confront the world. The country has dramatically increased its use of sanctions as a foreign policy tool and accumulated immense debt, relying on foreign investors to finance its excesses.
In conversations with financial executives, global investors, and experts in Asia and the U.S. over the past three weeks, a recurring theme emerged: growing concern over American overreach. Several sources, speaking anonymously, expressed doubts about how long the U.S. can continue without significant repercussions.
Despite these concerns, no credible alternative to the dollar has emerged. In Asia, there is increasing urgency to find an ‘America plus 1′ strategy to reduce U.S. exposure and boost non-dollar trade flows. However, efforts to build such systems are progressing slowly, if at all. Rising authoritarianism, threats to individual and property rights, and geopolitical tensions make other options even less attractive.
A recent survey indicates that central bank reserve managers plan to increase their dollar holdings over the next 12-24 months, drawn by the currency’s liquidity and the ongoing geopolitical tensions.
“Paradoxically, the U.S. dollar’s strength partly stems from its near-unchallenged safe-haven status,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University and former adviser to President Ronald Reagan. “However, most investors fail to grasp the geopolitical risks lurking beneath the surface until it’s too late.”
The dollar’s dominance is rooted in the United States’ democratic principles, the size of its economy, the depth of its markets, and the strength of its institutions and rule of law. However, recent events are testing these foundations. Attacks on the U.S. legal system, especially following the Trump verdict, are shaking confidence in these institutions.
Florida Governor Ron DeSantis, for example, called the court a “kangaroo court” on social media, asserting that “the verdict represents the culmination of a legal process bent to the political will of the actors involved.”
An Asian investor highlighted potential threats to U.S. institutions, particularly any undermining of the Federal Reserve’s authority. Such developments could lead to a significant depreciation of the dollar, he warned.
A senior New York-based financial executive, traveling in Asia, reported clients’ growing concerns about U.S. and Western financial policies. The ever-expanding array of sanctions is a primary worry, with the possible seizure of $300 billion in sovereign Russian assets over Ukraine being particularly contentious. “The West crossed a Rubicon there,” the executive noted.
An October 2021 Treasury Department review revealed that sanctions had surged from 912 in 2000 to 9,421 by that year, with both American adversaries and some allies reducing their dollar use in response.
An Asia-based investor is closely watching ByteDance’s challenge of a U.S. ban on TikTok, viewing it as a test of the U.S. legal system’s integrity. Should the U.S. government fail to substantiate claims that the app poses a national security threat, it would cast doubt on the independence of the legal system. Nevertheless, the investor conceded that the U.S. legal system remains more independent and reliable than many others.
As the U.S. continues to take actions that undermine confidence in its institutions and financial policies, the world remains in search of alternatives to the dollar. Despite the challenges, the dollar’s position as the global reserve currency remains unchallenged for now. However, the growing consternation at home and abroad suggests that this dominance cannot be taken for granted indefinitely.
