The recently released Republican convention platform to Make America Great Again contains a promise to keep the US dollar as the world's reserve currency. However, despite the dollar's current dominance, many aspects of the platform and Donald Trump's Agenda May Hasten Shift past conduct as president may actually undermine the dollar's global reserve status if he returns to office.
Foundations of Dollar Dominance
The dollar's incumbency as the world's reserve currency has sound foundations:
- The massive size of the US economy, around 25% of global GDP
- The depth, openness, and liquidity of US capital markets
- The US global leadership role
- A decent record of past macroeconomic management
- An innovative economy, strong financial institutions, and a rule of law
Many of these pillars, such as the US economic size, innovation, and superior financial system, are durable. However, the Republican platform and a potential Trump presidency could weaken other key factors.
Geopolitical Challenges
The global order built by the US through alliances and multilateralism continues to fragment amid greater dispersion in economic weight, the rise of China, US-China tensions, and other geopolitical shifts. Trump's past threats to leave NATO, abandonment of international agreements, and perceived closeness to Putin have led allies to discuss how to “Trump-proof” Europe and NATO.
Despite the platform's assertion that alliances will be strengthened, there are doubts about whether the US would remain a trusted partner under Trump. Growing unilateral use of financial sanctions by the US could also accelerate the decline of the dollar's global status.
Fiscal and Economic Concerns
The US fiscal trajectory is already dreadful, with excessive deficits projected for the next decade that will cause debt levels to soar, especially as entitlement costs rise with an aging population. Against this baseline, the Republican platform calls for large tax cuts and no cuts to Social Security and Medicare, without mentioning debt and deficits.
Under these Republican plans, US fiscal management would become even more unsound. The platform also fails to address Trump's past criticism of the Federal Reserve and pressure for lower rates, which called Fed independence into question.
On trade, Trump has called for across-the-board tariffs that economists believe would be inflationary and costly to households. The platform's call for mass deportation also goes against the economic benefits that immigration has provided to US growth.
Impact on the Dollar's Future
While dollar dominance remains entrenched for now, the Republican platform and Trump's policy orientation would mean: Less confidence and trust in American leadership, weakened macroeconomic management, enormous burdens on markets to finance a large supply of treasuries, a boost to the term premium, and higher inflation and less growth.
What can be concluded for now?
In short, this does not bode well for buttressing sustained dollar dominance in the long run. Even if dollar dominance diminishes at an accelerated rate, it would still take more than four years to unravel. However, the pillars supporting the dollar's global reserve currency role could be substantially weakened if Trump returns to the White House.
