Forex
In the Market: How the US is daring the world to find a dollar alternative
By Paritosh Bansal
(Reuters) -The United States is merrily chipping away at the pillars that hold up the dollar as the world’s reserve currency, with the latest blows coming from some powerful Americans questioning the rule of law following the conviction of Donald Trump.
In doing so, it is effectively daring the rest of the world to find an alternative – and so far, it appears to be winning.
The attacks on the legal system in the aftermath of former President Trump’s conviction follow other moves that are seen by some as the United States throwing down the gauntlet to the rest of the world.
The country has radically increased the use of sanctions as a punitive foreign policy tool. And it is adding on an immense amount of debt, leaving hapless foreigners who seek the safety and depth of its markets to fund its excesses.
Over the past three weeks, I have been asking financial services executives, global investors and other experts in Asia and the United States how long they think the Americans can keep at it without meaningful blowback. Several of the sources requested anonymity to speak candidly about the situation.
These conversations showed consternation is growing, both at home and abroad, about the consequences of U.S. hubris. But despite trying, no one so far has been able to find a credible alternative or expects one to emerge anytime soon, and they have partly themselves to blame.
In Asia, for example, people are asking with increasing urgency what’s their ‘America plus 1’, as they search for ways to reduce their U.S. exposure and boost non-dollar trade flows.
But attempts to build such systems are slow-going or haven’t gotten traction. And rising authoritarianism, threats to individual and property rights and geopolitical tensions have meant that even if U.S. assets are less attractive than they were before, other options are worse.
A recent survey, for example, shows central bank reserve managers plan to increase their dollar holdings over the next 12-24 months as the rise in global geopolitical tensions and need for liquidity draw them to the currency.
“Perhaps ironically, the U.S. dollar’s strength is, in part, due to its near-unchallenged safe-haven status,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University, who served on former President Ronald Reagan’s Council of Economic Advisers. “That said, most investors don’t understand geopolitics and the dangers that lurk below the surface – until it’s too late.”
DOLLAR’S DOMINANCE
At its core, the dollar’s dominant role in the world draws from the United States’ democratic principles. It is supported by the massive size of its economy, the depth of its markets, and the strength of its institutions and the rule of law.
The belief in democracy runs deep. Last week, I asked U.S. Securities and Exchange Commission Chair Gary Gensler, who has been in government since 1997, whether partisan politics had made the job of officials like him harder. A conservative-leaning U.S. appeals court had struck down one of his signature initiatives that morning.
“I believe in this constitutional system that we have. It’s messy,” Gensler said. “It’s democracy.”
Nevertheless, the messiness is testing some of the underpinnings of the dollar’s global appeal.
Attacks on the U.S. legal system have increased after the Trump verdict in a New York court. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on the social media platform X, saying “the verdict represents the culmination of a legal process that has been bent to the political will of the actors involved.”
A major investor based in Asia said potential threats to U.S. institutions were also worrying. Any debasing of the Federal Reserve’s authority — as Trump allies are reportedly contemplating — would affect the dollar’s credibility, the investor said, adding that such a development could see a double-digit depreciation of the currency.
Trump’s campaign for his Republican presidential bid has played down such reports of what conservative groups might be planning.
THICKET OF SANCTIONS
A senior New York-based financial services executive who was traveling in Asia said he is hearing from clients who think the U.S. and Western financial policy is “undermining the dollar and the Western financial system more broadly.”
He pointed to an “ever expanding thicket of sanctions” as one reason.
And the West is pushing the envelope further. The financial executive said the discussion that the West might seize some $300 billion of sovereign Russian assets that were blocked over Ukraine undermined the United States’ safe haven status. “The West crossed a Rubicon there,” the executive said.
An October 2021 Treasury Department review of sanctions found such designations had increased to 9,421 by that year from 912 in 2000. It noted at the time that “American adversaries — and some allies — are already reducing” their use of the dollar.
An Asia-based investor said he was watching another court case closely to test the strength of the rule of law: ByteDance’s challenge of a U.S. ban on TikTok. He is watching for the evidence that the U.S. government would produce to back up claims of the app being a national security threat.
If no proof is publicly offered, then it would “feel that the checks and balance, the independence of the legal system, may not be there — at least in this case,” the investor said.
But then he added that even that may not turn him away from the United States. It’s still more independent and better than many other places, he said.
Bank of America (BofA) analysts indicated that the prevailing bearish sentiment on Eastern Europe, Middle East, and Africa (EEMEA) foreign exchange (FX) is nearing its peak, particularly noting an exception for the Turkish lira (TRY).
According to BofA’s proprietary flow data, there is a record high in long positions on the U.S. dollar against emerging market (EM) currencies, which the analysts interpret as a contrarian signal that EM and EEMEA FX could soon start outperforming expectations, potentially beginning from February or March.
The report highlighted several currencies in the EEMEA region with a bullish outlook. The Polish zloty (PLN) is expected to strengthen due to a combination of a weaker dollar, a hawkish stance from Poland’s National Bank (NBP), and positive current account and foreign direct investment (FDI) inflows. The South African rand (ZAR) is also seen as bullish, with its undervaluation against the dollar poised to correct in a weaker USD environment.
In Turkey, the analysts are optimistic about the lira, citing tight monetary policy that supports adjustments in the current account, which should benefit the currency. Their forecast for the TRY is significantly more favorable than current forward rates.
The Israeli (ILS) has a neutral outlook from BofA, with predictions aligning with forward rates for the second quarter of 2025. However, they acknowledged potential upside risks for the shekel if ceasefire deals in the region are fully implemented.
For the Czech koruna (CZK), the report suggests that the currency is likely to perform better than forward rates indicate, as the Czech National Bank (CNB) is expected to be cautious with its easing cycle in the short term, and a weaker dollar should provide additional support.
Lastly, the Hungarian forint (HUF) is anticipated to gain strength from the second quarter onwards, bolstered by credible new central bank leadership and fiscal policy, alongside the influence of a weaker USD.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Investing.com – The US dollar drifted lower Wednesday amid uncertainty over President Donald Trump’s plans for tariffs, while sterling fell on disappointing government borrowing data.
At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 107.755, after a slide of over 1% at the start of the week.
Dollar slips on tariffs uncertainty
The dollar remained on the backfoot as traders tried to gauge the full extent of President Donald Trump’s plans for tariffs, and the potential pain the new administration plans to inflict on major trade partners.
Trump said late on Tuesday that his administration was discussing imposing a 10% tariff on goods imported from China on Feb. 1, the same day as he said Mexico and Canada would face levies of around 25%.
He also indicated that Europe would also suffer from the imposition of duties on European imports, but has refrained from enacting these tariffs despite signing a deluge of executive orders following his inauguration on Monday.
“Data will play a secondary role this week as all the attention will be on Trump’s first executive orders,” said analysts at ING, in a note. “Incidentally, the Federal Reserve is in the quiet period ahead of next Wednesday’s meeting. Expect a lot of ‘headline trading’ and short-term noise, with risks still skewed for a stronger dollar.”
Sterling falls after retail sales dip
In Europe, traded 0.1% lower to 1.2349, after data showed that Britain ran a bigger-than-expected budget deficit in December, lifted in part by rising debt interest costs.
was £17.8 billion pounds in December, more than £10 billion pounds higher than a year earlier, the Office for National Statistics said on Wednesday.
Rising UK government bond yields have added to the cost of servicing the country’s debt, and could result in the new Labour government having to cut government spending to meet its fiscal rules.
edged higher to 1.0429, but the single currency remains generally weak with the European Central Bank widely expected to cut interest rates more consistently this year than its main rivals, the Federal Reserve and the Bank of England.
The is seen cutting interest rates four times in the next six months, with a reduction next week largely expected to be a done deal.
“The direction is very clear,” ECB President Christine Lagarde told CNBC in Davos about interest rates. “The pace we shall see depends on data, but a gradual move is certainly something that comes to mind at the moment.”
BOJ meeting looms large
In Asia, dropped 0.1% to 155.69, ahead of the Bank of Japan’s two-day policy meeting later this week.
The is widely expected to raise interest rates on Friday, and could reiterate its commitment to further rate hikes if the economy maintains its recovery.
traded largely unchanged at 7.2715, with the Chinese currency still weak after Trump said he is considering imposing 10% tariffs on Chinese imports from Feb. 1.
Investing.com – Volatility in the US dollar following contradictory signals around the Trump administration’s plans for tariffs suggest that, at least in some ways, Trump’s second term will probably resemble the first, according to Capital Economics.
Tuesday’s sharp selloff in the US dollar followed reports that the many executive orders the new president would go on to sign didn’t include any immediate increase to US tariffs. A few hours later the greenback rebound after Trump suggested he will bring in 25% tariffs on China and Mexico in February.
“The first, and most obvious, point is that this is unlikely to be the last such episode over the second Trump presidency,” said analysts at Capital Economics, in a note dated Jan. 21, “with this pattern of leaks and counters familiar from the 2018-19 US-China trade war.”
“As was the case back then, uncertainty around Trump’s intentions will probably result in plenty of short-term volatility in currency markets.”
One key implication of these moves is that some expectations of higher tariffs are by now discounted, Capital Economics said.
Positioning data suggest that market participants are heavily long dollars, on net, increasing the scope for sell offs when there is dollar-negative news, whether on account of tariffs or other reasons.
It’s harder to make the case that expectations around tariffs have been the biggest driver in currency markets over recent months, or that higher US tariffs are anywhere close to fully discounted.
Instead, we think the main driver of the stronger dollar has been more prosaic: the rebound in US economic data since the Q3 recession scare, combined with bad news in Europe and China, has led to a shift in interest rate differentials in favor of the US.
That said, our working assumption remains that Trump will enact major tariffs on China later this year, “which is why we forecast the to be one of the worst-performing currencies this year.”
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