For a manager of foreign exchange reserves it used to be a no-brainer. You hold your money in the United States, simply because they possess a winning combination: a large, dynamic and integrated economy as well as robust public institutions, including a reliable central bank and an effective legal framework.
These institutions guarantee that you will not have to deal with an unreliable government, which for example, suddenly comes up with the idea of boosting inflation to burn off debts. Your money is safe and broad, deep markets ensure that you can easily repatriate big sums if you want to. A country like China lacks institutions that are independent of politics. Therefore the renminbi will never be able to match the status of the dollar, so I always thought.
But with president Donald Trump things have started to tilt. With his super-expansionary fiscal policies in times of economic boom, chances are that he will allow the economy to boil over. He not only risks a large wave of inflation, but also, according to the US Congressional Budget Office, that budget deficit results in a national debt of no less than 180% of GDP by 2035. Tellingly, Moody’s already warned that the USA’s ‘triple A’ status is in danger.
Steel and aluminium tariffs
Even more serious is the radical break that Trump made in December with his new ‘National Security Strategy’. According to this policy the boundaries between the political, economic and military domain no longer exist, boundaries that his predecessors have respected for seventy years. This means that Trump is no longer concerned with international rules (which ironically the US has often drawn up themselves). He will deal with trading partners bilaterally, based on the idea that it is easy to bully smaller countries. The steel and aluminium tariffs are an example of this new strategy, including the exceptions that he wants to make for ‘friendly’ countries. Mexico and Canada will be exempted from levies if they meet Trump elsewhere.
From here it is a small step to other arbitrary market restrictions. Foreign investors can easily be denied access to the US, countries can be excluded from international payment systems, and financial supervision can be twisted if deemed necessary. In such a situation exchange reserves in dollars are much less attractive.
Figures from the International Monetary Fund show that the share of dollars in worldwide foreign reserves has already fallen by 1.8 percentage points to 63.5% in the first three quarters of Trump’s presidency. That comes close to $ 175 billion in demand for dollars. The fund will present new figures at the end of this month. Undoubtedly, the dollar share will be a bit lower again. The euro and yes, the renminbi benefit.
- This column was first published in Het Financieele Dagblad on Monday, March 12th (in Dutch)