There may be a deeper reason for the dollar’s decline in recent weeks, rooted in the view of some in the Trump administration that the dollar’s status as a reserve currency is a liability to the U.S. economy. Their goal is to undermine the dollar’s status in the international monetary system as part of an effort to steadily weaken it against other currencies, hoping that a more devalued dollar could reduce trade deficits and attract U.S. manufacturers. If the administration truly intends to undermine the dollar’s status, the international monetary system could enter a form of anarchy not seen since President Richard Nixon unpegged the dollar’s value from gold more than 50 years ago. A sharp deterioration in the dollar’s international status would sharply increase the cost of borrowing for the U.S. while providing China with a much easier path to internationalizing its currency. Moreover, the growth of both the dollar and the US trade deficit over the past decade is not due to the reserve currency status, but to the fact that this has been a decade of “US exceptionalism,” and it is only natural that the relative dynamism of the US economy has attracted capital inflows into its stock and currency markets.
But if the international monetary system cannot rely on the dollar being fully convertible or available in a crisis, it is entering uncharted territory.
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