Rumours of the dollar’s demise have been greatly exaggerated
We are in the thick of global summitry, rolling from the G7 in Canada towards the NATO meeting in The Hague next week. President Trump is conducting foreign policy via social media, the prime ministers of the UK and Canada are having a pint in the pub and the French President is making stopovers in Greenland to give press conferences to a handful of curious locals. Meanwhile missiles rain down from Kiev to Tel Aviv and Russian President Putin offers to be a conflict mediator in the Middle East. The situation feels unstable, to say the least.
For financial investors, the typical response would be to invest in a deeply liquid safe haven asset. Historically this has been the US Dollar and US Treasuries but after the post-Liberation Day market volatility, concerns have been raised about whether the US is still a safe port in a storm. Trump’s deficit-busting Big Beautiful Bill and the Moody’s downgrade of the US credit rating certainly suggest ongoing increased US debt issuance, raising fears that supply will outstrip demand and render US government bonds less valuable.
So what is the alternative? The latest ECB report on “the international role of the euro” revealed that Gold had overtaken the Euro as the world’s second largest component of central bank reserve assets. ECB President Lagarde has described this as an opportunity for the single currency, describing it as a “global euro” moment. Of the $3 trillion turnover in foreign exchange markets that takes place every day in London, a quarter is traded in the EUR/USD currency pair. Lagarde pointed out that 40 per cent of global invoicing is done in Euros.
But if we return to the ECB report, we see the mountain that must be climbed. The Euro might be 16 per cent of global official reserves but the US Dollar is 46 per cent. Almost two thirds of the MSCI World Index is in US equities. Even in Canada, apparently waging a polite war against Trump’s annexation threats, the largest pension plan in the country, CPPIB, has invested almost half of its portfolio in the US, up five percentage points from the prior year.
This doesn’t mean the march up the mountain hasn’t begun. Tom Nides, Vice Chairman of Strategy and Client Relations at the private equity behemoth Blackstone recently said “We’ve been quite, quite optimistic [on Europe]. Governments are relatively stable here. Shifting money to Europe is certainly not a bad bet”.
This is the Europe where the Dutch government just collapsed, the far-right Chega party have replaced the Socialist party to become Portugal’s opposition after a snap election, protestors have taken to the streets of Madrid to demand an election as prime minister Sanchez becomes embroiled in corruption allegations against his associates, France has had its second consecutive unelected prime minister, and Germany’s new leader was initially defeated in the parliamentary vote to make him Chancellor for the first time in post-war history.
Voters are angry. Coalitions are fraying. Coherent electoral mandates are hard to come by. Just ask Rachel Reeves and Keir Starmer as they try to square the restoration of winter fuel payments with the restriction of disability benefits. If a government with a landslide working majority of 165 is struggling to pass votes, you know we are in unstable territory.
Conversely, the US electoral system has delivered a leader who won his election and the popular vote, whose party has won both houses of the legislature, and who selected ideologically friendly justices for the courts in his prior electoral term. The separation of powers upon which the US constitution was designed in order to force negotiation between parties has been lined up under one man with one clear agenda. It might be an agenda that makes little economic sense to international investors but it is not inherently unstable given it is entirely predictable.
Rumours of the dollar’s demise have been greatly exaggerated. Trump might be pursuing a radical plan that is challenging a long held economic orthodoxy but the world is a long way from having an alternative to deep and liquid US markets.
Helen Thomas is chief executive of Blonde Money