How the US is daring the world to find an alternative to the dollar

The US is merrily chipping away at the pillars that hold up the dollar as the world's reserve currency, with the latest blows coming from some powerful Americans questioning the rule of law after the conviction of former president Donald Trump.

In doing so, it is effectively daring the rest of the world to find an alternative, and so far it appears to be winning.

The attacks on the legal system in the aftermath of Trump’s conviction follow other moves seen by some as the US throwing down the gauntlet to the rest of the world.

The country has radically increased the use of sanctions as a punitive foreign policy tool. It is adding on an immense amount of debt, leaving hapless foreigners who seek the safety and depth of its markets to fund its excesses.

Over the past three weeks, I have been asking financial services executives, global investors and other experts in Asia and the US how long they think the Americans can keep at it without meaningful blow back. Several sources requested anonymity to speak candidly about the situation.

The conversations showed consternation is growing, at home and abroad, about the consequences of US hubris. However, despite trying, no one so far has been able to find a credible alternative or expects one to emerge soon, and they have partly themselves to blame.

In Asia, for example, people are asking with increasing urgency what is their “America plus 1" as they search for ways to reduce their US exposure and boost non-dollar trade flows.

However, attempts to build such systems are slow going or haven't gained traction. Rising authoritarianism, threats to individual and property rights and geopolitical tensions have meant that even if US assets are less attractive than they were before, other options are worse.

A recent survey, for example, shows central bank reserve managers plan to increase their dollar holdings over the next 12 to 24 months as the rise in global geopolitical tensions and need for liquidity draw them to the currency.

“Perhaps ironically, the US dollar's strength is, in part, due to its near unchallenged safe haven status,” said Steve H Hanke, a professor of applied economics at Johns Hopkins University who served on former president Ronald Reagan's council of economic advisers.

“That said, most investors don't understand geopolitics and the dangers that lurk below the surface until it's too late.”

At its core, the dollar's dominant role in the world draws from America's democratic principles. It is supported by the massive size of its economy, the depth of its markets and the strength of its institutions and the rule of law.

The belief in democracy runs deep. Last week, I asked US securities and exchange commission chair Gary Gensler, who has been in government since 1997, whether partisan politics had made the job of officials like him harder. A conservative-leaning US appeals court had struck down one of his signature initiatives that morning.

“I believe in the constitutional system we have. It's messy. It's democracy,” he said.

Nevertheless, the messiness is testing some of the underpinnings of the dollar's global appeal.

Attacks on the US legal system have increased after the Trump verdict in a New York court. Florida governor Ron DeSantis, for example, called it a “kangaroo court” on the social media platform X, saying “the verdict represents the culmination of a legal process that has been bent to the political will of the actors involved”.

A major investor based in Asia said potential threats to US institutions were also worrying. Any debasing of the Federal Reserve's authority, as Trump allies are reportedly contemplating, would affect the dollar’s credibility, the investor said, adding such a development could see a double-digit depreciation of the currency.

Trump's campaign for his Republican presidential bid has played down such reports of what conservative groups might be planning.

A senior New York-based financial services executive who was travelling in Asia said he is hearing from clients who think the US and Western financial policy is “undermining the dollar and the Western financial system more broadly”.

He pointed to an “ever-expanding thicket of sanctions” as one reason.

The West is pushing the envelope further. The financial executive said the discussion that the West might seize $300bn (R5.6-trillion) of sovereign Russian assets blocked over Ukraine undermined the safe haven status of the US.

“The West crossed a Rubicon there,” the executive said.

An October 2021 treasury department review of sanctions found such designations had increased to 9,421 by that year from 912 in 2000. It noted at the time that “American adversaries — and some allies — are already reducing” their use of the dollar.

An Asia-based investor said he was watching another court case closely to test the strength of the rule of law: ByteDance's challenge of a US ban on TikTok. He is watching for evidence the US government would produce to back claims about the app being a national security threat.

If no proof is publicly offered, it would “feel the checks and balance, the independence of the legal system, may not be there, at least in this case”, the investor said.

However, he added even that may not turn him away from the US. He said it continues to be more independent and better than many other places.

Reuters