In a lead editorial, The Economist says:

The dollar is meant to be a source of safety. Lately, however, it has been a cause of fear. Since its peak in mid-January the greenback has fallen by over 9% against a basket of major currencies. Two-fifths of that fall has happened since April 1st, even as the yield on ten-year Treasuries has crept up by 0.2 percentage points. That mix of rising yields and a falling currency is a warning sign: if investors are fleeing even though returns are up, it must be because they think America has become more risky. Rumours are rife that big foreign asset managers are dumping greenbacks.

For decades investors have counted on the stability of American assets, making them the keystones of global finance. The depth of a $27trn market helps make Treasuries a haven; the dollar dominates trade in everything from goods and commodities to derivatives. The system is buttressed by the Federal Reserve, which promises low inflation, and by America’s sturdy governance, under which foreigners and their money have been welcome and secure. In just a few weeks President Donald Trump has replaced these ironclad assumptions with stomach-churning doubts.

This crisis-in-the-making was created in the White House. Mr Trump’s reckless trade war has raised tariffs by roughly a factor of ten and created economic uncertainty. Once the envy of the world, America’s economy is now courting recession, as tariffs rupture supply chains, boost inflation and punish consumers.

What makes this economic downturn and the loss of fiscal discipline so explosive is the fact that markets are starting to doubt whether Mr Trump can govern America competently or consistently. The shambolic, incoherent way the tariffs were calculated, unveiled and delayed was a mockery of policymaking. On-again, off-again exemptions and sectoral tariffs promote lobbying. For decades America has carefully signalled its dedication to a strong dollar. Today some White House advisers are talking about the reserve currency as if it were a burden to be shared—using coercion if necessary.

As America dithered, the shock could spread from Treasuries to the rest of the financial system, bringing defaults and hedge-fund blow-ups. That is the sort of behaviour you would expect in an emerging market.

A currency is only as good as the government that backs it. The longer America’s political system fails to grapple with its deficits or flirts with chaotic or discriminatory rules, the more likely will be a once-in-a-generation upheaval that pushes the global financial system into the unknown. Wherever things settled, the greenback’s diminished role would be a tragedy for America.

The Associated Press reports:

Among the threats tariffs pose to the U.S. economy, none may be as strange as the sell-off in the dollar.

Currencies rise and fall all the time because of inflation fears, central bank moves and other factors. But economists worry that the recent drop in the dollar is so dramatic that it reflects something more ominous as President Donald Trump tries to reshape global trade: a loss of confidence in the U.S.

The dollar’s dominance in cross-border trade and as a safe haven has been nurtured by administrations of both parties for decades because it helps keep U.S. borrowing costs down and allows Washington to project power abroad — enormous advantages that could possibly disappear if faith in the U.S. was damaged.

“Global trust and reliance on the dollar was built up over a half century or more,” says University of California, Berkeley, economist Barry Eichengreen. “But it can be lost in the blink of an eye.”

Since mid-January, the dollar has fallen 9% against a basket of currencies, a rare and steep decline, to its lowest level in three years.

Many investors spooked by Trump don’t think the dollar will be pushed quickly from its position as the world’s reserve currency, instead expecting more of a slow decline. But even that is scary enough, given the benefits that would be lost.
With much of world’s goods exchanged in dollars, demand for the currency has stayed strong even as the U.S. has doubled federal debt in a dozen years and does other things that would normally send investors fleeing. That has allowed the U.S. government, consumers and businesses to borrow at unnaturally low rates, which has helped speed economic growth and lift standards of living.

Dollar dominance also allows the U.S. to push around other countries like Venezuela, Iran and Russia by locking them out of a currency they need to buy and sell with others.

Now that “exorbitant privilege,” as economists call it, is suddenly at risk. [Continue reading…]