The Fragile Foundation of Global Finance

The U.S.dollar’s dominance in global finance is undeniable. It underpins nearly 90% of all foreign exchange transactions, acting as a cornerstone for international trade and investment. However, recent policy decisions emanating from washington are raising serious questions about the dollar’s long-term stability and the potential ramifications for the global economy.

Market Reaction: A Vote of No Confidence?

Following President Trump’s proclamation of new customs policies on April 1st, financial markets reacted swiftly. By April 21st, the dollar had depreciated by 6%. Simultaneously, yields on 10-year U.S. Treasury bonds increased by 0.25 percentage points, also equivalent to a 6% rise. This simultaneous decline in the dollar’s value and increase in bond yields is particularly concerning.

Traditionally, rising interest rates have bolstered the dollar’s strength. The current inverse relationship suggests a growing unease among global investors, who may be losing faith in the dollar as the world’s primary reserve currency and U.S.Treasury bonds as the safest investment haven. Instead of the usual flight to both the dollar and U.S. goverment bonds during times of uncertainty,investors are seemingly divesting from both.

The Specter of a Dollar Collapse

Some analysts are even suggesting that Trump’s policies could trigger the end of the dollar’s reign as the world’s reserve currency,perhaps destabilizing the U.S.-dominated global financial system. This system, established after President Nixon severed the dollar’s link to gold in 1971, relies heavily on the dollar’s stability and widespread acceptance.

Nixon’s decision effectively removed the constraints on the dollar supply, allowing banks to create money through lending. This, coupled with the dismantling of capital controls initiated by the Reagan administration in 1981, paved the way for the unprecedented expansion of the global financial system we see today.

The Dollar’s Indispensable Role

The dollar’s importance cannot be overstated. It is the bedrock upon which other currencies and bonds are built. Without this anchor, the entire system risks collapse.Consider these statistics:

• Over 80% of global trade is invoiced in U.S. dollars.
• The dollar is involved in nearly 90% of all foreign exchange transactions.
• The U.S. dollar accounts for almost 60% of central bank reserves worldwide.

While the Euro holds the second largest share of central bank reserves, it lags far behind at approximately 20%. Furthermore, U.S. Treasury bonds represent over 40% of global government bonds,with a market volume roughly twelve times larger than that of all German federal bonds,which are considered a safe haven within the Eurozone. While Japan plays a role, its influence is less important. China, despite its economic might, faces challenges due to concerns about legal certainty and capital controls, deterring many international investors.

Avoiding Catastrophe: A Course Correction?

Given the lack of viable alternatives to the U.S. dollar in the short to medium term, a sudden abandonment of the dollar would have catastrophic consequences, potentially triggering a global economic depression even more severe than that of the 1930s. Fortunately, such a scenario remains unlikely.

While President Trump’s policies may appear erratic, it is anticipated that he will ultimately adjust course to prevent the complete destruction of the U.S. and global economies. The stakes are simply too high to ignore.