Love for US$ to continue?
US President Donald Trump addressed the Economic Club of New York on Tuesday. Attendees and global investors eagerly awaited any mention of tariff policy or China trade negotiations—two issues that have come to dominate risk sentiment in recent weeks, overshadowing another perennial irritant for the US president: a strong US dollar.
In broad terms, the US currency has been on a rising trend over the last decade. The dollar index currently trades around 36% higher than its 2008 low.
Greenback strength in part reflects its global dominance. A recent Bank for International Settlements survey showed that daily trading in foreign exchange markets reached an equivalent of USD 6.6 trillion earlier this year; of that sum, USD 5.8 trillion involved the US dollar. This is further amplified by the scale of the US equity and bond markets. Last year, the US accounted for around 40% of equity market capitalization and outstanding issuance in bond markets globally.
But the US dollar’s central role is not set in stone, and the following are a number of long-term dynamics worth monitoring:
· US economic and foreign policy. Rising US public debt and more populist policies have fueled concerns over the US fiscal outlook. The national debt has grown 16% under the current US administration to USD 23 trillion, and the next presidential term could usher in another significant round of government spending. In addition, the current White House has levied tariffs and imposed financial sanctions more widely and stringently than previous administrations, and often with a political lens. This has disrupted the established international status quo in certain areas, raising concerns abroad about the risks of US dollar dependence.
· The shifting world economic order. The global financial and trade system is increasingly complex, with diverging national interests. As the center of global economic growth shifts from West to East, it is pulling some countries away from the established multilateral system. China's rising economic, technological, and geopolitical clout is creating an increasingly bipolar world order, and the Chinese renminbi has the biggest potential to play a more important role as a global currency in the long term.
· A more balanced global system. Substituting for the dominant US dollar with another single currency may not be the optimal solution for a multi-polar world.
So while the US dollar will likely maintain a dominant role, and indeed could benefit from near-term uncertainty, there could see a gradual transition away from it. And though the shift may appear far away on the horizon, the structural changes in this market as too important to ignore for anyone who invests or does business internationally.
