John Cassidy writes:

It’s been a couple of weeks since Donald Trump and his cohort tried to bully the U.S.’s European allies into submission over Greenland, but the reverberations are still being felt. “There was a real sense that we were witnessing a moment of rupture,” Eswar Prasad, an economist at Cornell University and the Brookings Institution, who was attending the annual World Economic Forum, in Davos, Switzerland, when Trump flew in, recounted to me. “One thing that was clear to Europeans was that they can no longer trust the U.S. as a reliable ally on military security, economic security, or any other major matter.” The geostrategic implications of this realization are still coming into focus, as many governments around the world ponder the warning from Mark Carney, the Prime Minister of Canada, that “middle powers” need to come together in self-defense. In the financial markets, where things move faster, there has already been a dramatic reaction—one that has raised new questions about U.S. economic leadership and the dollar’s long-standing status as the dominant global currency.

After Trump vowed to impose tariffs on European countries that were resisting his claims to Greenland, the stock market plunged. The dollar fell, too. But shortly after arriving in Davos, he abruptly dropped his tariff threat and declared, on seemingly little basis, to have reached a “long-term deal” over the Arctic territory, and stocks quickly recovered most of their losses. Some observers hailed the President’s reversal as a repeat of last April, when he announced hefty tariffs on nearly a hundred countries, only to slash them a week later after investors puked. Whatever political chaos that Trump might be sowing, there is a pervasive sentiment on Wall Street that the markets will curb his most extreme impulses: as the saying coined by the Financial Times columnist Robert Armstrong goes, “Trump Always Chickens Out”—“TACO” for short.

But while the stock market, which is firmly in the grip of A.I. fever, rapidly shrugged off the Greenland crisis, the value of the dollar continued to decline: by last Thursday, it had fallen about three per cent. To the uninitiated, this might not sound like a big move, but the market for dollars is highly liquid—millions of transactions are taking place at any given time—and sudden price jumps are rare. During the run-up to Davos, there wasn’t any big news about G.D.P. growth, interest rates, or other economic factors that influence currency traders. “The only thing that is new is that the U.S. President issued a military threat against a NATO ally and threatened new tariffs on other U.S. allies that are also big creditor countries to the U.S.,” Brad Setser, a senior fellow of international economics at the Council on Foreign Relations, told me. “A capricious U.S. President played the key role in triggering this—he set it off.” [Continue reading…]