The United States may be unintentionally pushing the world to ditch the dollar as the global reserve currency, according to a Reuters report.
The report highlights a growing disconnect between US actions and the core principles that have traditionally supported the dollar’s dominance.
A key concern is the recent criticism of the US legal system following the conviction of Donald Trump. This has sparked worries about the rule of law, a cornerstone of trust in the dollar.
The report further points to the US’s increasing use of sanctions as a foreign policy tool. While aimed at punishing nations, this strategy is seen by some as risky and potentially damaging to the global financial system.
Additionally, the US’s ballooning national debt raises questions about its long-term economic health.
According to Reuters, financial experts worldwide are expressing growing unease about these developments. However, despite these concerns, the dollar remains the world’s dominant reserve currency. This is primarily due to the unmatched depth and liquidity of US financial markets.
The dollar’s dominant global role stems from the United States’ democratic principles, the vast size of its economy, the depth of its markets, and the robustness of its institutions and the rule of law. The belief in democracy runs deep.
Speaking with Reuters, US Securities and Exchange Commission Chair Gary Gensler, said, “I believe in this constitutional system that we have. It’s messy,” adding “It’s democracy.”
However, the messiness is testing some of the dollar’s foundational appeal. Attacks on the US legal system have surged following the Trump verdict. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on social media, claiming the verdict reflects a legal process swayed by political actors.
An Asian investor expressed concern over potential threats to US institutions. Undermining the Federal Reserve’s authority, as some Trump allies are reportedly considering, could damage the dollar’s credibility, potentially causing a significant depreciation of the currency.
Trump’s presidential campaign has downplayed such reports regarding conservative groups’ plans.
Thicket of Sanctions
A senior New York-based financial services executive travelling in Asia mentioned clients’ concerns that US and Western financial policies are “undermining the dollar and the Western financial system more broadly.” He highlighted the “ever-expanding thicket of sanctions” as a key issue, according to Reuters.
The West’s actions have indeed pushed boundaries. The executive cited the discussion about seizing $300 billion of Russian assets blocked over Ukraine, which he believes undermined the U.S.’s safe-haven status. “The West crossed a Rubicon there,” he said.
A 2021 Treasury Department review found sanctions had surged to 9,421 by that year from 912 in 2000. It noted that “American adversaries — and some allies — are already reducing” their dollar usage.
Reuters reports that an Asia-based investor is closely watching another case to gauge the rule of law: ByteDance’s challenge of a US ban on TikTok. The investor is looking for evidence to support the government’s national security claims against the app.
If no proof is publicly provided, it would suggest a lack of checks and balances in the legal system, the investor said.
However, he added that even this might not deter him from the US, as it remains more independent and reliable than many other alternatives.
The Reuters report concludes with a surprising finding: despite the anxieties, no credible alternative to the dollar has emerged yet. The search for alternatives is slow, and other options currently seem less attractive due to rising authoritarianism and geopolitical tensions elsewhere. Ironically, the report suggests, the very factors undermining trust in the US dollar are, for now, keeping it afloat.
