Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Trump White House Accelerating Toward a US Dollar Crisis

Currencies / US Dollar Jul 31, 2020 - 05:37 PM GMT

By: Dan_Steinbock


As US economy is heading toward its disastrous 2nd quarter results, the Trump administration is considering the expansion of the trade war to finance, which could destabilize the US dollar and derail the post-pandemic global economy.

After its failure in the COVID-19 containment and the expected -53 percent plunge of real GDP growth in the 2nd quarter, President Trump’s re-election campaign is in serious trouble. To deflect the blame, his administration has launched a series of provocative measures against China thereby fueling elevated bilateral tensions.

Worse, the White House is reportedly considering moving from a bilateral trade war to an effort to exclude China from the dollar-denominated international payment network. In Beijing, that would be seen as weaponization of US dollar.

Created in Brussels in 1973 – after the rise of US deficits, weaker US dollar and its decoupling from the gold standard – the dollar clearing and settlement system (Society for Worldwide Interbank Financial Telecommunication, SWIFT) is ostensibly a non-profit organization. Yet, its first CEO was a former executive of American Express and its data centers are in the US, Netherlands and Switzerland.

According to critics, the SWIFT’s status changed after 9/11, when the Bush administration, true to its unipolar stance on US security and defense, seized the payments network as an added tool in “coercive diplomacy.”  In the Trump era, coercive diplomacy has been expanded in US economic engagements.

The SWIFT itself is said to oppose such measures, which could cost it a huge number of clients. After all, a contract on connecting to SWIFT is signed with each major bank separately, not the country.

Trump trade hawks’ dream of Plaza Accord 2.0

In the inter-dependent global economy, international trade and finance are two sides of the same coin. Cross-border trade transactions rely on an effective international payments system and a robust network of financial institutions issuing credit.

That infrastructure remains built around US dollar, which the Trump administration would like to leverage to contain China’s rise.

In the postwar era, the Japanese yen's might peaked in the mid-1980s, when Tokyo agreed to a managed trade deal in New York City's midtown Plaza Hotel. The controversial pact led the US, France, West Germany, the UK and Japan to depreciate US dollar relative to the Japanese yen and Deutsche mark by intervening in the currency markets.

It was this exchange-rate manipulation that played a key role in Japan’s subsequent containment, by paving the way to its asset bubble in the early 1990s and the subsequent lost decades.

But China is not going to follow that path.

Diversification away from US treasury bills

Through the Trump years, China has resisted protectionism and trade wars. But as a defensive measure, Beijing may now be forced to prepare against the risks of being cut off from the US dollar payment system.

Under the US dollar payment system, China remains vulnerable to potential US sanctions.

As long as China holds $1.1 trillion in US treasury bills and large investments that remain denominated in US dollars, exposure remains high. Over time, Beijing can diversify away from some of these bills and investments, while internationalization of the renminbi would reduce reliance on the US dollar.

China is preparing for currency swap facilities as part of the Belt and Road Initiative (BRI) and in the Regional Comprehensive Economic Partnership (RCEP) with many Southeast Asian countries. Similarly, according to a recent report, sovereign wealth funds expect China to remain in the economic driving seat, despite the Trump administration’s cold wars.

Thanks to the long-term potential of Chinese economy and finance, renmibi’s role as a global reserve currency and its rising attractiveness for international transactions, the time is right for accelerated internationalization. As China is now the first major economy to defuse the COVID-19 impact and is rebounding, global demand for renminbi assets is rising.

Augmenting dollar-based payment systems

During the 2008 financial crisis, China's central bank's then-chief Zhou Xiochuan revived Keynes's idea of bancor, an international currency, while several major economies began talks about diversification away from US dollar.

In 2015, the BRICS New Development Bank proposed having 50 percent of projects financed by local currencies. More recently, several countries and groups of countries, including China and Russia, have pushed for alternative payment systems parallel to the SWIFT, as a defensive measure.

In fall 2019, India, Russia and China were reportedly exploring an alternative to the US-dominated SWIFT mechanism. Last January, after the US exit from the Iran nuclear deal, Germany, France and the UK set up an alternative payment channel with Iran (INSTEX), to help continue trade and circumvent US sanctions.  

In March 2020, the Shanghai Cooperation Organization (SCO) agreed to develop a roadmap to conduct bilateral trade, investments, mutual settlements and issue bonds in national currencies. The SCO members include China, Russia, Central Asian states, as well as India and Pakistan.

Moreover, the nascent plans for the world’s first official digital currency (CBDC) by China’s central bank foster the potential for a complementary payment infrastructure.

In the postwar era, then-France’s finance minister Valéry Giscard d’Estaing described the dollar’s role as the leading global reserve currency as an “exorbitant leverage.” Unlike any other nation worldwide, the US can print money at negligible cost and use it to purchase goods and services worldwide.

In 1971, when European ministers worried about the export of US inflation, President Nixon’s Treasury Secretary famously stated that the dollar “is our currency, but your problem.”

At the time, financial globalization was still minimal. With the opening up of global capital markets, the US has not only been able to project its exorbitant leverage over the entire world but the White House has repeatedly weaponized that power since 9/11.

Trump White House is hastening the eclipse of US dollar

Today, four-fifths of global trade remains invoiced and settled in dollars, and most transactions are cleared through US financial system. Yet, Washington can isolate or block any nation from that system for its unilateral goals. Limiting capital flows worldwide, such restrictions have far broader effects than bilateral trade tariffs.

All that’s needed to impose such gargantuan limits is for US president to invoke the 1977 International Emergency Economic Powers Act (IEEPA). President Bush seized the IEEPA against terrorism; President Obama against transnational criminal organizations.

In his “maximum pressure” foreign policy, the Trump administration has used “national emergency” as pretext for economic goals and may be moving toward the Trading with the Enemy Act (TWA), which was central to US Cold War containment policy.  

Recently, the dollar has taken a beating on Wall Street. As US national debt is $27 trillion - 133 percent of US GDP – the dollar is facing a period of elevated volatility, due to still another round of unlimited quantitative easing by the Federal Reserve.

Today, the greatest threat to the dollar-denominated global infrastructure is not China, Russia or European Union, but the Trump administration. With its unilateral use of the international payments system, it is accelerating the path toward a dollar crisis.

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see  

© 2020 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in