Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: You haven't heard an expression. Dollar is king.
Speaker 3: The dollar is king.
Speaker 2: We're going to keep it that way.
Speaker 1: Okay.
Speaker 4: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 4: and this is Trumpnomics, the podcast that looks at the
Speaker 4: economic world of Donald Trump, how he's already shaped the
Speaker 4: global economy, and what on earth is going to happen next.
Speaker 4: This week, we're asking does the rise of trump Andomics
Speaker 4: mark the beginning of the end for the dollar. The
Speaker 4: US has faced serious competition on a number of fronts
Speaker 4: in recent decades, but its currency has not. Roughly nine
Speaker 4: out of ten foreign exchange transactions are conducted in dollars
Speaker 4: and almost half of all merchandise trade. The greenback also
Speaker 4: makes up nearly sixty percent of the reserves held by
Speaker 4: governments around the world, and that unrivaled position for the
Speaker 4: dollar as the world's dominant reserve currency has brought some
Speaker 4: big advantages to US policymakers and consumers over the years.
Speaker 4: We'll get into some of those in this show, and
Speaker 4: as President Trump likes to point out, it has also
Speaker 4: tended to make US exports a bit less competitive. That
Speaker 4: might explain why the administration doesn't seem very bothered by
Speaker 4: the nearly ten percent fall in the value of the
Speaker 4: dollar in the first six months of this year. That's
Speaker 4: the worst decline in the first half of any year
Speaker 4: since nineteen seventy three. But if that fall marks not
Speaker 4: a market adjustment but the beginning of a much deeper
Speaker 4: loss of confidence in the US currency in America's unique
Speaker 4: role in the global order, then potentially this administration, future administrations,
Speaker 4: and Americans more broadly, well they might start to care
Speaker 4: quite a lot. So how did the greenback become and
Speaker 4: stay the dominant reserve currency for so long? Have Donald
Speaker 4: Trump's policies seriously put it under threat? And what are
Speaker 4: the consequences for all of us if the dollar is
Speaker 4: no longer global top dog. Well, that's what's on my
Speaker 4: list for this episode, and I have investment grade guests
Speaker 4: to help me with the assignment. Our own. Seleia mosen Bloomberg,
Speaker 4: senior Washington correspondent, an author of the book paper Soldiers,
Speaker 4: How the Weaponization of the Dollar Changed the World Order,
Speaker 4: and dialing in from California, an academic whose work you
Speaker 4: could say is the reserve currency of global debate, on
Speaker 4: this topic. Doctor Barry eichen Green, Professor of economics and
Speaker 4: political science at the University of California, Berkeley, and doctor
Speaker 4: I Confu is also the author of a new book,
Speaker 4: Money Beyond Borders. I quite want to go back to basics,
Speaker 4: fors eichen Green, you suggested in a column for Vox
Speaker 4: eu that an understanding of Roman mythology can shed light
Speaker 4: on the way the world decides on a go to
Speaker 4: reserve currency. Explain to us how Roman gods Mars and
Speaker 4: Mercury can help explain how reserve currencies get to be
Speaker 4: reserve currencies, and how the dollar has been so dominant
Speaker 4: for so long.
Speaker 2: So the Mars and Mercury reference is designed to alert
Speaker 2: listeners to the fact that there are really two sets
Speaker 2: of factors that influence the attractions of a currency globally
Speaker 2: the economic importance of an economy. So the dollar rose
Speaker 2: to prominence after World War Two, when the US became
Speaker 2: the largest economy in the world. The leading crater have
Speaker 2: the largest financial markets, but at the same time cure
Speaker 2: political factors international relations, alliance politics for the tendency of
Speaker 2: central banks and governments to hold and use currencies. So
Speaker 2: in the nineteen sixties, the West Chairman government and the
Speaker 2: Japanese government, which relied on the United States for their defense.
Speaker 2: We're willing to support the dollar through tough times. If
Speaker 2: you look today, you find that the central banks of
Speaker 2: South Korea and Japan hold more dollars as reserves than
Speaker 2: their trade relations and financial relations with the United States
Speaker 2: would lead you to expect. So there are worries about
Speaker 2: the fact that the US share in the global economy
Speaker 2: has been declining gradually over time. But now there are
Speaker 2: also worries about fraying US alliances, whether Donald Trump will
Speaker 2: turn his back on NATO, whether he's making friends or
Speaker 2: enemies abroad, and how that will affect the attractions of
Speaker 2: the dollar.
Speaker 4: I guess some people listening will still be curious about
Speaker 4: where Miles and Mercury come.
Speaker 2: In, Beyon, The reference came from my classically trained co.
Speaker 4: Authors, but it's Mercury is the.
Speaker 2: God of commerce and Mars the god of war.
Speaker 4: Indeed, you did some estimates which I think you kind
Speaker 4: of referred us back to more recently, because it seems
Speaker 4: even more relevant than when you first wrote the paper
Speaker 4: a few years back, to the impact on things like
Speaker 4: the cost of borrowing for the US government and holdings
Speaker 4: of reserves. If you think those two roles of the
Speaker 4: US economy are somewhat ebbing.
Speaker 2: Our back of the envelope estimates, or that the cost
Speaker 2: of borrowing for the US Treasury would go up by
Speaker 2: fifty sixty seventy basis points a bit less than one
Speaker 2: percentage point from its present what four percent on the
Speaker 2: ten year treasury? Were these alliance incentives to disappear?
Speaker 4: And that's the security that's just from the fact that
Speaker 4: these allies are not sort of over investing in dollars,
Speaker 4: if you like, because they are receiving this sort of
Speaker 4: other support from the US.
Speaker 2: Exactly, and that this would have an impact on the
Speaker 2: dollar exchange rate as well.
Speaker 4: And Celia, I guess you should sort of updates briefly.
Speaker 4: I mean I mentioned some of the headline numbers at
Speaker 4: the start, but what have we seen in foreign exchange
Speaker 4: markets since the start of the year and what do
Speaker 4: you think might be driving it?
Speaker 1: Well, there's hard data that is a drop in the
Speaker 1: dollar compared to the global basket of currencies that we
Speaker 1: look at Bloomberg.
Speaker 3: There's also the narrative.
Speaker 1: There's a narrative of a sell America trend that has
Speaker 1: picked up and is almost taken a hold as the
Speaker 1: market tries to adjust and then readjust to shifting tariff policies.
Speaker 1: We're seeing for the first time in a long time
Speaker 1: the sell in America narrative coming while there's concerns about
Speaker 1: America's ability to manage its public finances. So the US
Speaker 1: debt trajectory fiscal outlook is really really bad with no
Speaker 1: fix on the horizon. It doesn't seem that there is
Speaker 1: any party in Washington that actually cares about doing anything
Speaker 1: and making the difficult trade offs that would be required,
Speaker 1: and that in turn starts as vortex of Okay, people
Speaker 1: are selling out of American assets. That means American power
Speaker 1: to sort of outsource its geopolitical objectives by imposing economic
Speaker 1: sanctions that's going to be less potent. And if nations
Speaker 1: and companies in multinational corporations are using fewer dollars, then
Speaker 1: American policymakers have less visibility into how the global financial
Speaker 1: system is being used for malign activities.
Speaker 2: And after what Saliah said, I think global investors are
Speaker 2: watching very carefully what's happening in terms of federal reserve independence.
Speaker 2: That is a very important factor in how they regard
Speaker 2: the dollar, and.
Speaker 4: I guess we could also add the integrity of US
Speaker 4: economic statistics insofar as that's also had a few shadows
Speaker 4: potentially cast over the last few weeks with the firing
Speaker 4: of the head of the Bureau of Labor Statistics. I
Speaker 4: mean today, I know you've talked to these senior policymakers
Speaker 4: a lot off the record, but we tended to have
Speaker 4: pretty mixed messages on this, haven't we. I saw that
Speaker 4: the President recently said he wanted a strong dollar, but
Speaker 4: he also didn't like that that made it harder to
Speaker 4: sell exports that kind of inflated the value of the dollar.
Speaker 4: So how much do you feel the administration cares about
Speaker 4: this global role for the dollar.
Speaker 3: I think they do care.
Speaker 1: I think Trump really does like the idea of the
Speaker 1: dollar being a strong man kind of like him, that
Speaker 1: can survive a lot. They're really putting it to the test.
Speaker 1: But like any politician, the Trump team wants the benefits
Speaker 1: of a strong dollar and then the benefits of a
Speaker 1: week dollar all to happen at the same time, which
Speaker 1: is kind of not possible. And they're also sending mixed
Speaker 1: messages around the key pillars of what makes the dollar
Speaker 1: the reserve asset and so trusted by foreign investors. As
Speaker 1: very alluded to, that is the rule of law, the
Speaker 1: free and fair elections, that we have, the strong democracy,
Speaker 1: that we have independent agencies, and an independent central bank.
Speaker 1: Each of these pillars, every tenant is now being a.
Speaker 4: We touched on this a little bit in an earlier
Speaker 4: episode this year when we were talking about the potential
Speaker 4: for a so called Mara Lago accord. You know, Stephen Myron,
Speaker 4: who's now a senior economic advisor to the administration, had
Speaker 4: sort of sketched out a potential sort of deal that
Speaker 4: could be done between the US and its trading partners
Speaker 4: where somehow the rest of the world would pay for
Speaker 4: more of the burden of having this global reserve currency.
Speaker 4: Whether or not we think there's anything in that, or
Speaker 4: whether there's going to ultimately be any negotiations along those lines,
Speaker 4: I mean, Barry Eckingreen, you could argue that it's been
Speaker 4: a public good for the world to have a global
Speaker 4: reserve currency. In most times in global history we haven't
Speaker 4: had one, and maybe it's not unreasonable for the US
Speaker 4: to want countries to kind of pay in one way
Speaker 4: or another to continue to have a global reserve currency.
Speaker 2: I think it's important to recognize also that the United
Speaker 2: States derives very significant benefits from the dollars international role.
Speaker 2: So people in the Trump administration would say there are costs.
Speaker 2: US exporters find it a little bit more difficult to
Speaker 2: do international business because the dollar is stronger than otherwise.
Speaker 2: Although I would put the value of the dollar way
Speaker 2: down on the list of determinants of US export competitiveness,
Speaker 2: below the skills and training of American workers, the up
Speaker 2: to datedness of our technology and our capital stock, and
Speaker 2: so forth, and then whether the dollar is a few
Speaker 2: percentage points higher or lower enters the list. On the
Speaker 2: other side of the balance sheet, US banks and firms
Speaker 2: have the convenience of being able to do cross border
Speaker 2: business in their own currency. They don't have to pay
Speaker 2: to purchase insurance hedges if you will, The Treasury can
Speaker 2: borrow at a lower cost than otherwise. We discussed that earlier,
Speaker 2: and the US gets another form of insurance from the
Speaker 2: dollars international role. The dollar is a safe haven some
Speaker 2: when a bad thing happens, everybody rushes into dollars and
Speaker 2: into US financial markets, and that's what has been different
Speaker 2: it appears about the spring of twenty twenty five that
Speaker 2: when this reciprocal care of upheaval occurred, people rushed out
Speaker 2: of dollars.
Speaker 3: Not in yes, so Lea.
Speaker 4: I mean that's something I think you mentioned in the
Speaker 4: piece that you wrote. There has always been that very
Speaker 4: striking safe haven quality to US markets and the dollar
Speaker 4: in particular, where you can have, in the extreme example,
Speaker 4: you can have a shock involving the possibility of the
Speaker 4: US defaulting. You know, when there's been a sort of
Speaker 4: standoff over the debt ceiling in Washington and investors are
Speaker 4: worried about, you, the US defaulting. Well, that's a scary
Speaker 4: thing happening. So then people go into US treasuries even
Speaker 4: though the US treasuries are the asset that might be
Speaker 4: defaulted on. That is clearly something has changed this year
Speaker 4: when it comes to things like that.
Speaker 3: Oh it has.
Speaker 1: I mean global financial crisis is clear example of when
Speaker 1: everyone should have been pouring out of American assets because
Speaker 1: the US created and caused the subprime mortgage collapse that
Speaker 1: led to the global financial crisis. But everybody piled in
Speaker 1: just to as proof that the dollar is so resilient,
Speaker 1: and it wasn't. The case in April. But one thing
Speaker 1: to note is just the benefits that Barry pointed out
Speaker 1: to the US for being the owner of the reserve asset.
Speaker 1: It hits every single American consumer because if there is
Speaker 1: just a few percentage point increase to the tenure and
Speaker 1: what are borrowing costs are going to be, that is
Speaker 1: going to affect credit card debt, mortgage rates, auto loans,
Speaker 1: student loans, everything. That tiny number is not actually tiny
Speaker 1: when it comes to the household accounts. And that's actually
Speaker 1: the essence of Trumpanomics. It's economic populism. Trump does not
Speaker 1: want that number to go up, and he talks about it.
Speaker 1: He talks about borrowing costs going up and that the
Speaker 1: Federal Reserve should do something about it. Again, cognitive dissonance,
Speaker 1: not realizing that the fix that you're proposing is actually
Speaker 1: going to damage it. And that goes with their views
Speaker 1: of the dollar as well.
Speaker 4: You mentioned the financial crisis, and I noticed that the
Speaker 4: other time that we'd had a big fall in the
Speaker 4: dollar was in I think twenty ten, when the Federal
Speaker 4: Reserve was cutting interest rates, and that was possibly also
Speaker 4: adjusting from the rise that you were just referenced. In
Speaker 4: the middle of the crisis. Currencies can swing ten percent
Speaker 4: either direction, even the world's reserve currency, and it doesn't
Speaker 4: necessarily mean it's a paradigm shift in reserve currencies, which
Speaker 4: obviously a subject to much more kind of long term trends.
Speaker 4: Are we just kind of overreading this movement of the
Speaker 4: last six months, I guess, Barrychngreen first.
Speaker 2: It's possible. I'm reminded of the nineteen seventies when the
Speaker 2: Bretton Woods system ended, the dollar was devalued, it began
Speaker 2: to fall on the for and exchange market. In nineteen
Speaker 2: seventy six, Charles Kindelberger, one of the most eminent monetary
Speaker 2: and economic historians a stay said the dollar is quote
Speaker 2: finished as an international currency, which obviously did not turn
Speaker 2: out to be the case. When there is an incumbent
Speaker 2: international currency, it takes a big, persistent shock to displace it,
Speaker 2: and there has to be an alternative, and it's not
Speaker 2: clear that those conditions are present.
Speaker 4: Well, actually, I was just going to follow up on that,
Speaker 4: and I know that Selio will to say something on
Speaker 4: this as well, But I mean that has been always
Speaker 4: been the answer that people have given, and goodness knows,
Speaker 4: these discussions have been held over the decades, and I
Speaker 4: suspect that Professor I agree, it has been involved in
Speaker 4: a great many of them. But the answer that's always
Speaker 4: given is, you know, these things take a really long time.
Speaker 4: The UK sterling was the dominant globe reserve currency for
Speaker 4: a long time, long after the US overtook the UK
Speaker 4: in terms of its economy. There was something like seventy
Speaker 4: years before the US dollar actually became the global reserve currency.
Speaker 4: Those kind of shifts just take a really long time.
Speaker 4: And crucially, if you're going to move out of the dollar,
Speaker 4: you need an alternative, and it isn't clear yet that
Speaker 4: there is an alternative to the dollar out there.
Speaker 2: It isn't clear because there aren't enough safe and liquid
Speaker 2: euro denominated reserve assets available to the rest of the world,
Speaker 2: and it's not clear that the European Union is in
Speaker 2: a position to create them. China is moving as fast
Speaker 2: as it can to promote international use of its currency,
Speaker 2: but it is starting out way behind the dollar. So
Speaker 2: even if use of its currency continues for cross border payments,
Speaker 2: for example, continues to increase the double digit rates, it
Speaker 2: will take a decade or longer before the Chinese renman
Speaker 2: bee comes within haaling distance of the dollar. So you know,
Speaker 2: these kind of events occur slowly until they occur quickly.
Speaker 4: I mean, I guess the other alternatives. We talk a
Speaker 4: lot about crypto these days. I mean, there's bitcoin, many
Speaker 4: might say was a potential alternative, and also people talk
Speaker 4: about stable coins, although I know that they have a
Speaker 4: slightly different implication for the dollar. But are either of
Speaker 4: those sort of likely alternatives.
Speaker 1: I actually think the most likely alternative is going to
Speaker 1: be a multi currency era rather than one currency taking over.
Speaker 1: We may face decades where the dollar is still dominant,
Speaker 1: but not quite as dominant.
Speaker 3: Maybe it was never designed to or meant to, or
Speaker 3: doesn't need.
Speaker 1: To be quite as powerful as it is in today's
Speaker 1: financial system, and we might see that the Euro rises
Speaker 1: a little bit more, the yen, maybe the yuon, and
Speaker 1: maybe some of these other currencies or other assets like
Speaker 1: stable coins and maybe even bitcoin. But I think when
Speaker 1: I think about alternatives, I don't think of one. I
Speaker 1: think of many. And that's a shock. It feels incremental,
Speaker 1: but it will be a shock to the system because
Speaker 1: then you might have things like runs on currencies with
Speaker 1: investors trying to figure out where is the safest place
Speaker 1: to go.
Speaker 4: Possibly, we don't care so much about a gradual decline
Speaker 4: of a dollar, or at least if one is just
Speaker 4: thinking about the sort of stability of global system, we'd
Speaker 4: be much less worried about that than we would a
Speaker 4: sudden questioning of the US government's credit worthiness and a
Speaker 4: dash for the exits from the dollar. I mean, I
Speaker 4: can green, how much do you think the probability of
Speaker 4: that kind of dollar route has gone up in the
Speaker 4: last year or so.
Speaker 2: It has certainly gone up. If you're asking me for
Speaker 2: a number, not provide. But I would have been dismissive
Speaker 2: of those stories of a route until this year. I
Speaker 2: would have agreed with Salia that the most likely scenario
Speaker 2: is a gradual transition to a more multipolar system. But
Speaker 2: I think we now need to entertain the possibility of
Speaker 2: a route as well, simply because of the level of
Speaker 2: noise and chaos in terms of US policy. And I
Speaker 2: do worry that if there is a sudden big move
Speaker 2: in the value of the dollar, because foreign official and
Speaker 2: private investors row significantly more reluctant to hold and use it,
Speaker 2: that could destabilize the US treasury market. That could destabilize
Speaker 2: important financial institutions that hold dollar denominated assets that are
Speaker 2: suddenly losing value on the foreign exchange market. That could
Speaker 2: have quite dire consequences were to occur.
Speaker 4: We don't want to put numbers on the probability, but
Speaker 4: when does a decline become a route what kind of
Speaker 4: numbers would be talking I mean, we've seen a ten
Speaker 4: percent decline, We've seen that investors have more and more
Speaker 4: reason potentially to put their sort of marginal dollar in
Speaker 4: other countries. But when would you start worrying about a
Speaker 4: sort of self fueling spiral? Is does it need to
Speaker 4: be another ten percent when you're modeling these things, what
Speaker 4: kind of numbers are you thinking?
Speaker 2: Well, I think you have to worry both about how
Speaker 2: much the currency moves and what the timeframe for the
Speaker 2: movement is. So another ten or twenty percent over the
Speaker 2: next couple of years would wo not be hard for
Speaker 2: the markets to accommodate. Another twenty percent over the next
Speaker 2: couple of months, on the other hand, would be a
Speaker 2: big deal.
Speaker 4: It's in the tradition of this podcast that probably we
Speaker 4: would have had another ten percent before it even comes out,
Speaker 4: because we've got about a week at least a week
Speaker 4: or so's delay after recording it. I guess, Celia, if
Speaker 4: we saw that kind of decline, we've already seen the
Speaker 4: administration sort of parry and declare truces and delays when
Speaker 4: there's a lot of pressure, for example, on the bond market.
Speaker 4: If you saw a big fall in the dollar, potentially
Speaker 4: associated with other market moves, how do you think this
Speaker 4: president reacts to that.
Speaker 1: I would imagine that the current Treasure Secretary, Scott Bessant,
Speaker 1: would either himself or advise the President to make some
Speaker 1: kind of statement to stabilize the dollar. Traditionally it's been
Speaker 1: the Treasure secretary. But also you have to think about
Speaker 1: what and who would markets trust because investors are smart.
Speaker 1: They want to see that the policy is backing the
Speaker 1: words and the rhetoric. And in the past we've seen
Speaker 1: Treasury work with the Federal Reserve. I've spoken to former
Speaker 1: fedificial Don Cone about his time at the FED when
Speaker 1: they had to come out with a one two punch
Speaker 1: around the global financial crisis, working with Treasury hand in
Speaker 1: hand to stabilize Marcus. And that's how airtight the case
Speaker 1: needs to be made to persuade investors to believe them.
Speaker 1: It cannot just be a truth social post by the president,
Speaker 1: or it cannot just be a comment by the treasure
Speaker 1: secretary on airwaves.
Speaker 4: I'm just thinking if we look at the revealed preference,
Speaker 4: as we might say, for this president is just to
Speaker 4: beat up on trading partners with the greatest stick. And
Speaker 4: he has said, for example, that he's going to do
Speaker 4: one hundred percent tariff. So I can't remember very high
Speaker 4: tariffs on anybody in the bricks group that tries to
Speaker 4: develop an alternative reserve currency. I mean, you could imagine
Speaker 4: him wanting to come out with sort of big numbers
Speaker 4: that people who are going to invest in dollars. Maybe
Speaker 4: it's forcing pressuring central banks to buy lots of dollars
Speaker 4: for their reserves to prop up the currency. Barry Eichengreen,
Speaker 4: is there any scope for that kind of I mean,
Speaker 4: you just tend to think that's the kind of thing
Speaker 4: that the president will be reaching for. But is that
Speaker 4: possible in an enormous global currency market.
Speaker 2: I do not think so so. Stephanie, you talked before
Speaker 2: about the idea of Amara Lago a court where the
Speaker 2: president threatens tear ups if other countries don't let their
Speaker 2: currency strengthen in the dollar weaken and now you're kind
Speaker 2: of suggesting the opposite. The fact of the matter is,
Speaker 2: as Salaya alluded to, the only branch of government that
Speaker 2: can affect what happens to the dollar ultimately is the FED.
Speaker 2: And the FED could strengthen the dollar, where to weaken
Speaker 2: significantly buy wait for it, raise an interest rates? How
Speaker 2: would that be received in the quarters the pressury, and
Speaker 2: the Oval Office.
Speaker 1: And really that's the path untrodden, right, We've never seen
Speaker 1: the US have to bully the world into turning to
Speaker 1: the dollar has always been a charm tactic.
Speaker 4: Well, we will leave that question hanging in the air,
Speaker 4: that unanswered question of how the president would respond to
Speaker 4: having to raise interest rates in order to defend the dollar.
Speaker 4: But Professor Barry I. Kingreen, Sleia Mosen, thank you.
Speaker 3: So much, Thank you, thanks for having us, Thanks.
Speaker 4: For listening to Trumponomics from Bloomberg. It was hosted by
Speaker 4: me Stephanie flanders I was joined by Selaiya Mosen and
Speaker 4: Dr Barry Chenreen. Trumponomics is produced by Moses and dam
Speaker 4: and Samasadi with help from Amy Keen and special thanks
Speaker 4: to Rachel Lewis Chrisky and John Ring. Sage. Bowman is
Speaker 4: the head of Bloomberg Podcast, and please, we'd love you
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