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Donald Trump’s bravado masks unsustainable debt and a go-it-alone approach that’s doomed to fail
- The US is playing hardball with other economies now, but without cooperation it can’t devalue its dollar, and it will need other countries’ help when the good times come to an end
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Why you can trust SCMP
On Wednesday, the US Federal Reserve Chairman Jerome Powell announced a cut in the federal funds rate by 25 basis points, citing “global developments” and “muted inflation”. This was evidently insufficient to appease either markets or President Donald Trump, who asked for a “large cut” just before the Federal Open Market Committee (FOMC) meeting.
After the announcement, Trump tweeted, “as usual, Powell let us down”. On Thursday, Trump announced 10 per cent more tariffs on US$300 billion of Chinese imports. US markets fell by 1 per cent and the dollar strengthened slightly against other currencies.
How do we make sense of what is happening to the dollar, the world’s most important reserve currency?
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The dollar accounts for 44 per cent of daily global foreign exchange trading and accounts for roughly 60 per cent of total official foreign exchange reserves. Because the dollar has a very liquid market both onshore and offshore, companies and governments like to borrow in dollars, especially when interest rates are low.
As the Bank for International Settlements reported, there is now US$14 trillion in US dollar debt booked offshore. The US also has a negative net international investment position of US$9.5 trillion, or 47.4 per cent of gross domestic product as of the end of 2018.
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