In 1965, the then French Minister of Finance, Valéry Giscard d’Estaing, lamented that the US dollar shone with ‘exorbitant privilege’. As the global reserve currency, it enabled Washington to finance current account deficits at low rates of interest, a consequence of the dollar being the mooring of the global financial system. The currency reserves of central banks, notably after 1970, were held in dollars; international transactions were conducted using dollars. From this flowed on other benefits: US residents were not burdened by currency conversion fees, and the shielding of a currency from exchange rate shocks.
The exorbitant privilege attributed to the dollar comes with other consequences. Economics professor Barry Eichengreen, writing in the aftermath of the Global Financial Crisis (2007-2009), noted that cheap foreign financing kept the lid on US interest rates, ‘enabling American households to live beyond their means’. But this also meant that ‘poor households in the developed world ended up subsidizing rich ones in the United States.’
Eichengreen, writing in 2010, was already pondering the possibility that the dollar’s pre-eminence would be challenged. He suggested that only ‘serious economic and financial mismanagement by the United States could precipitate flight from the dollar’. Such ‘serious mismanagement, recent events remind us, is not something that can be ruled out. We may yet suffer a dollar crash, but only if we bring it on ourselves.’ These observations are starting to resemble prophetic writ.
Even before the tariff-fuelled reshaping of the global trade system announced by US President Donald Trump on April 2, political shifts had already compelled various central banks to move away from US Treasury holdings. The central banks of Russia and China, for instance, have preferred to increase their gold reserves. ‘This reduces their need for precautionary reserves of US dollars and US Treasuries,’ reasons Natasha Kaneva, J.P. Morgan’s head of global commodities strategy, ‘which in turn frees up capital to be deployed in growth-boosting domestic projects.’ In 2022, the Central Bank of the Russian Federation went so far as to link the ruble to gold.
In October 2024, J.P. Morgan released a commentary noting that the dollar’s reserve currency status had been eroded with the emergence of new trading blocs, pushed by Russia’s invasion of Ukraine in February 2022, and the Washington-Beijing rivalry. De-dollarisation has also been taking place in certain branches of the global economy, most notably commodities. In terms of petroleum exports, Russia has encouraged its customers to use local currencies.
With the ‘Liberation Day’ tariffs announced in early April, a regime striking for its unevenness and economic illiteracy, the greenback has suffered precipitate falls. Even as fears that the US economy might be pushed into recession started bubbling away, countries with current account surpluses denoted in US assets began chewing over the prospects of moving capital back into their domestic markets. This would only cause a further depreciation in the dollar.
The narrative of ‘America First’, at least as things stand, is rapidly turning into one of ‘Sell America First’.
Then came another move of typical petulance from Trump: threatening the chair of the US Federal Reserve, Jerome Powell. On Truth Social, the president demanded the imposition of pre-emptive cuts to interest rates; the White House had made its own determination that the demon of inflation remained in check. However, there would be a ‘SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW.’ While interest rates had been lowered in Europe, Powell, fearing the inflationary effects of tariffs, had been reluctant to follow suit ‘except when it came to the Election period when he lowered in order to help Sleepy Joe Biden, later Kamala, get elected.’
In his spray of indignation, the President even considered the possibility that Powell might be sacked, something only possible in instances of severe misconduct. Trump administration officials also issued threatening messages about what might happen to the chair, with White House National Economic Council Director Kevin Hassett telling a press gaggle that, ‘The President and his team will continue to study that matter [of removing Powell].’ Just to further confuse an already spooked market, Trump reversed his position on April 22: ‘I have no intention of firing him’, he told reporters. ‘I would like to see him be a little more active in terms of his idea to lower interest rates.’ As this drama unfolded, the dollar fell further.
In the scouring for alternative, safer currencies, the Euro, the Swiss franc and the Japanese yen have emerged as contenders. As the greenback tumbles, returns from 10-year US government bonds have risen. This is unusual, as such a tendency tends to afflict developing economies and markets, where volatility and uncertainty can see sudden flights of capital.
Trump’s great tariff wall, erected to stimulate US industries and revive, in nostalgic fashion, a manufacturing base lost to the dictates of free trade, is clearly having a number of unintended effects. The followers of de-dollarisation will have much reason to celebrate, even as the ghost of d’Estaing is stirred. The narrative of ‘America First’, at least as things stand, is rapidly turning into one of ‘Sell America First’.
Dr. Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He currently lectures at RMIT University.