Between Fed rate cuts and the dominant US dollar, Donald Trump can’t have it all

Has the Trump administration forgotten what happened after Richard Nixon pressured the Fed to pump up the economy in 1972? Also, Washington’s sanctions on other countries might turn them against the US financial system and the dollar

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US President Donald Trump (left) walks with Jerome Powell in 2017 before announcing him as his nominee for chair of the Federal Reserve. Trump has been calling for Powell to cut interest rates. Photo: AP

Published: 11:00pm, 2 Jul 2019Updated: 12:04am, 3 Jul 2019

The pre-eminent status of the US dollar in the global financial system, even in the era of floating exchange rates, has long afforded the United States the latitude to pursue its domestic policy agenda, knowing that the rest of the world has to hold its currency anyway to facilitate international transactions.

But that “exorbitant privilege”, to use the term coined in 1965 by Valéry Giscard d’Estaing, then France’s finance minister, should not be taken for granted by Washington. The centrality of the US dollar to the world’s financial system rests on a number of foundations, some of which are being eroded by Washington’s actions.

That’s not to say the dollar’s pre-eminence will be challenged any time soon. In the last century, even as the US eclipsed Britain economically, it still took decades for the greenback to supersede the British pound as the world’s primary reserve currency. But it did happen.

In the long run, given China’s economic heft, it would be reasonable to assume the yuan could become a major challenger to the US dollar’s hegemony. Yet, such a development would also require the world to become less keen on holding US dollars – otherwise there would be no demand for an alternative.

Admittedly, as former Federal Reserve Chairman Ben Bernanke wrote in a Brookings Institution post in 2016, the US dollar benefits from, among other things, its “stability of value” – with the US central bank having kept a good grip on price inflation since the 1980s – and from the “liquidity” and “safety” afforded to investors by the depth of the US Treasury market.

Yet, US President Donald Trump has been calling for Jerome Powell, the Fed’s current chairman, to cut interest rates. Perhaps Trump and his advisers have forgotten that, in the past, the White House’s successful pressuring of the Fed had undesired consequences: notably, the stagflation that followed on from Richard Nixon cajoling Fed chair Arthur Burns to pump up the US economy ahead of the 1972 presidential election.

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