Some Concerns Arise About the Security of U.S. Assets, Especially the Dollar
Is the Irreversible Harm to the Dollar's Prestige Set in Stone?
An increasing doubt lingers among global investors over the security of U.S. assets, particularly the dollar. This uncertainty stems from President Donald Trump's controversial tariff policies and blame game with the Federal Reserve.
The U.S. dollar has been the leading currency in global trade since the aftermath of World War II. However, Trump's decisions and derision towards the Federal Reserve have shaken the financial market's confidence in the dollar's invincibility.
Analysts opine that the dollar's top spot may not be threatened imminently as no viable alternative to the dollar is in sight yet. The dollar still dominates global trade, with countries and central banks holding signifycant dollar reserves.
However, the long-held trend of dollar dominance faces a 'confidence crisis' as investors question the safety of U.S. Treasury bonds and the strength of the U.S. economy. This loss of faith has weakened the dollar by about 8% against foreign currencies this year.
Despite its historical dominance, the dollar encounters a broader crisis of confidence in U.S. assets. In the midst of this challenge, several analysts believe that the worst of the dollar's decline may be over.
Even though alternative assets like gold, German bonds, and emerging market stocks may be gaining popularity, many analysts view the current shift in investment as tactical rather than a fundamental reassessment of U.S. assets.
Potential Long-Term Effects of Trump's Policies
- Economic Instability and Risk Perception:
- Trump's tariffs have led to economic instability, causing risk-off episodes and potentially eroding the dollar's safe-haven status[2].
- Fiscal Implications:
- Tariffs act like a tax and can negatively impact the dollar by suggesting fiscal consolidation and potential monetary policy easing[4]. This might reduce demand for short-term U.S. financial assets.
- Supply Chain Shifts:
- Tariffs may induce significant shifts in global supply chains, possibly reducing the reliance on U.S. trade and dollar-denominated transactions over time[1].
- Monetary Policy and Institutional Credibility:
- Criticism of the Federal Reserve can undermine its independence and credibility, affecting monetary policy stability and the allure of U.S. assets, potentially impacting the dollar's value[5].
As Trump's tenure rattles the global financial system, diversification towards alternative currencies may gradually diminish the dollar's global role. The dollar's supremacy may inch towards an accelerated decline due to these factors[5].
However, the dollar's deep entrenchment in international finance and trade ensures that it will retain a key role in the global economy for the foreseeable future.
- The criticism of President Trump's tariff policies and the derision towards the Federal Reserve may lead to a shift in investor preference towards decentralized finance (DeFi) and initial coin offerings (ICO), as these alternatives may offer more security and stability compared to traditional finance business.
- As the dollar's dominance in global trade faces a 'confidence crisis', traders might increasingly opt for decentralized trading platforms, particularly those based on DeFi and cryptocurrencies, in search of more reliable and secure finance business.
