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President Donald Trump’s electoral victory last November was decisive and sweeping. He now has majority control over both legislative houses, i.e. the lower house called the Congress or House of Representatives, and the upper house called the Senate. Sometimes both houses together are also misleadingly called the “Congress”.
He has of course the control of the White House, and this is called a “governing trifecta”, which is a sweet spot. He has already exercised his increased influence in the passage of 64 executive orders in barely three weeks of assuming office of the President for the second time.
On one hand his desire to reduce the trade deficit and make the dollar cheaper is to increase American exports and jobs. On the other hand, he wants the dollar to remain the strong and dominant currency in the world
Unlike his first term which began in 2017, he also has a two third majority of the conservative judiciary. This might prove crucial if he tries to deliver on his promise of no birthright citizenship. This cannot be merely done by an executive order, and might require a constitutional amendment, which might in turn be challenged in the Supreme Court. The apex court could come to Trump’s aid, although this is not guaranteed in this case of citizenship debate.
The President has threatened that America will charge reciprocal import tariffs, as a tit for tat strategy
Trump’s popularity is also supposed to be ten percent higher than what he got from his voters, which means that even some of those who did not vote for him now support his policies. These policies cover tariff action against trading partners, stricter action against illegal aliens, withdrawing from expensive wars in distant theatres and making NATO allies pay more, and finally reducing the size of the government.
The President has threatened that America will charge reciprocal import tariffs, as a tit for tat strategy. In response India has immediately reduced import duty on American Bourbon whiskey from 150 to 100 percent. The duty on Harley Davidson motorcycles was reduced earlier. India enjoys a trade surplus of about 30 billion dollars with the U.S., and it is this that Donald Trump wants to reduce. The defense purchases of F35 fighters and other combat vehicles are on the cards, partly to assuage U.S. sentiment.
Neither the pound sterling in terminal decline since the second world war, nor the euro born in 1999, nor the Chinese yuan are anywhere close to the dollar’s unmatched supremacy
Some of President Trump’s wishes seem contradictory. On one hand his desire to reduce the trade deficit and make the dollar cheaper is to increase American exports and jobs. On the other hand, he wants the dollar to remain the strong and dominant currency in the world.
He threatened the BRICS nations, of which India is a member, that if they contemplate trading among themselves in non-dollar currencies, then he will impose 100 percent import tariffs on them. You can’t simultaneously ask for a weak and a strong dollar. The fact is that the dollar index, measured as DXY is close to being the highest it has been in the past twenty-five years.
It is due to the strong desire of the rest of the world to hold dollars, or dollar assets
So, what is the real source of the dollar strength and its hegemony? Is it due to President Trump’s political support and popularity? Or his enjoying the governance trifecta? Not really. Incidentally, the trifecta is still not good enough because in the upper house, the Senate, the bills need a 60 percent majority to be passed as law. Which Trump does not have at this stage. There are some murmurs from within the Republican Party, which indicate less than enthusiastic support for some of Trump policies, especially on downsizing government and cutting benefits.
Trump has already warned BRICS nations not to transact in non-dollar currencies. The preference for dollar invoicing is due to its inherent stability
Yet what is the real source of dollar’s hegemonic status? The first is simply that there is no other candidate currency. Neither the pound sterling in terminal decline since the second world war, nor the euro born in 1999, nor the Chinese yuan are anywhere close to the dollar’s unmatched supremacy. In terms of global trade, the U.S. share is barely 11 percent. But the U.S. economy makes up one fourth of the global GDP and of course is the largest. President Trump is upset about the trade deficit which is close to 1 trillion dollars.
Mirroring that, the Chinese have a trade surplus of 1 trillion dollars, one third of which is with the United States. Many countries including India have a trade surplus with America. So, what happens to all the surplus dollars held by export surplus countries? It is in the form of exchange reserves. A whopping sixty percent of all reserves worldwide are held in dollar assets, i.e. United States government issued bonds.
Whenever there is global turmoil and uncertainty, investors rush to dollar assets, causing outflows from developing countries, and leading to a fall of their currencies. This has happened to India as well
So that is the real reason for dollar hegemony. It is due to the strong desire of the rest of the world to hold dollars, or dollar assets. This creates a strong demand for U.S. bonds, which reduces the cost of borrowing for the U.S. government. This is the enormous privilege enjoyed by the U.S. due to the dominant status of its currency.
To add to the privileges of dominance is another favorable factor, and it is that ninety percent of all foreign exchange transactions worldwide are in dollars. It is the most preferred invoicing currency. Trump has already warned BRICS nations not to transact in non-dollar currencies. The preference for dollar invoicing is due to its inherent stability.
The rise of India and China in the twenty first century will surely challenge the hegemony of the dollar
And the belief that America will never default on its debt. This is tested from time to time, since the law and constitution does not allow the U.S. government to pile on unlimited debt. It is currently about 33 trillion dollars. But the debt ceiling cannot be breached unless approved by the Congress, which sometimes leads to brinkmanship between the ruling party and the opposition. But invariably the debt ceiling is relaxed, until the new limit has to be relaxed again in a few years.
Whenever there is global turmoil and uncertainty, investors rush to dollar assets, causing outflows from developing countries, and leading to a fall of their currencies. This has happened to India as well. But the real reason is that implicitly the world has faith in the stability of America’s financial system, its judiciary in resolving disputes speedily and fairly, its capability of resilience, and the US government’s way of not passing too many irrational and isolationist laws and policies.
Of course, none of this can be taken for granted. The rise of India and China in the twenty first century will surely challenge the hegemony of the dollar. India’s rise is benign, while China’s rise threatens the west. Their evolving bilateral relationship will surely shape world trajectory as well as affect the dollar’s dominance. But for now, the dollar is king.