It’s evidence of how far alarm about the decline of the dollar’s global role has spread that even Liz Truss, whose salad days as UK prime minister lasted less than seven weeks, cites it as one of her major fears. Then again, given Truss’s record on understanding financial markets and delivering a stable currency, you might also say that’s strong evidence that the concerns are misplaced.Indeed, although there seems to be a fresh round of concern that upward pressure on prices, geopolitical risk and the US’s foreign entanglements will drag the currency down and reduce its global influence, so far there isn’t much evidence of it. The dollar strengthened this week as forecasts of Federal Reserve interest rate cuts were scaled back in light of unexpectedly high inflation. It’s a currency’s normal reaction to interest rate differentials. If there were fears US inflation was getting out of control and shaking confidence in monetary policy we might expect to see it weakening, not strengthening, and the prospects for American growth underperforming rather than outperforming other economies.
In fact, recent episodes of heightened geopolitical and financial market stress have tended to show the dollar’s role as a safe haven has survived, even when the damage is self-inflicted. The currency even rallied, or at least held its own, when the US Congress threatened to default on Treasuries during the debt-ceiling crises of 2021 and 2023.
The most recent call from inside the house is the prospect, discussed in a story in Politico this month, of an incoming Trump administration trying to use a dollar devaluation to reduce the trade deficit, especially with China, on top of the tariffs it imposed during the first term. In reality, a resumption of the currency wars of the 2000s and 2010s is unlikely to do much to reduce the US deficit nor undermine the dollar’s global role in bank funding, payment systems and reserves.