Why “America First” is bad news for the US dollar

Since WW2, the US has been the world's dominant political and military force. That's now changing – and it means a weaker US dollar. John Stepek looks at what's behind the change, and how to position your portfolio.

Donald Trump © Mark Wilson/Getty Images

Trump has been mouthing off at virtually everyone ahead of the G20 summit

Donald Trump © Mark Wilson/Getty Images

Today we're kicking off by talking about global trade. Before I get started, if you haven't downloaded our free report on the future of global trade (in association with currency specialists OFX), then I urge you to do so it's free of charge and there's a lot of original content in there from the MoneyWeek team, including Dominic. Check it out here.

Anyway, before they fell out, a deal between the US and China was "about 90% of the way there", according to US Treasury Secretary Steve Mnuchin.

As a result, he's hopeful that when Donald Trump and Xi Jinping meet this weekend on the sidelines of the G20 meeting in Japan, they'll be able to start hammering things out again.

Of course, as everyone from Theresa May to poor Neil Woodford knows to their cost, that teensy little 10% can mean all the difference.

Trump may be warming markets up for a reconciliation with China

Stockmarkets got a bit of a boost early on yesterday on hopes that Trump and Xi might kiss and make-up or at least start following each other on Instagram again (or whatever "the kids" are doing these days).

By the end of the day, hopes had faded somewhat. But it's interesting that Trump has been ramping up attacks on everyone else this morning ahead of the G20 summit.

The headline grabber was his accusation that the US would go to war to protect Japan, "but if we are attacked, Japan doesn't have to help us at all. They can watch on a Sony television".

He also got incensed at the EU for targeting US companies with competition probes. And he got annoyed with India over its tit-for-tat retaliation on tariffs, after the US revoked the country's special trade privileges.

Whether this is a tactic or not, talking tough about everyone else does enable Trump to lay off China for a bit without looking as though he's "gone soft".

The other interesting thing and, I believe, the ultimately far more consequential thing is that it's very clear that Trump is still pursuing the "America First" policy, regardless of old alliances.

And whether you like him or not, he does have a point. The US spends a lot of money on defence, and its allies benefit from that.

Now there are lots of historical reasons for that. It's pushing it a bit to accuse Japan of freeloading, for example, when its position in World War II meant that for many decades, most of the world was more than happy for it to maintain a pacifist stance. Same goes for Germany, which has been accused of not pulling its weight on defence spending.

And of course, this dominance means that the US gets to entrench both hard and soft power everywhere it goes. The price for being the global hegemon is to be the global policeman too.

So I'm not saying for a minute that Trump is playing entirely fair here. To a very great extent, the world is the way it is because the US wanted it this way.

But under Trump who in turn was elected by a group of people who got rather sick of the current arrangement this has definitely changed.

This is why he's somewhat less of a warmonger than we've seen from leaders of the past 30 years at least. It's not because he's a bleeding-heart humanitarian. It's because he doesn't see the point of wasting American lives and money on foreign wars of questionable value (witness his apparent hesitancy over engaging Iran at the weekend).

The end of "Pax Americana" also means the end of US dollar dominance

But what does this mean for investors? If the US gradually disengages from this role, then that implies other things too.

Why is the US dollar the world's reserve currency? Two reasons: the US has an incredibly powerful economy; and it has the military might to stand behind that incredibly powerful economy.

If you take away one and you start using the other (your economic dominance) as a weapon, rather than a form of soft power, then other countries will start looking for alternatives.

Think of the operating systems on your smartphone. Most people use iOS (Apple) or Android (the Google-backed one).

Now imagine that Android started charging you per minute for using the operating system. Not only that, but if it didn't like a post you put out on Twitter, it would cut off your internet access at random.

Everyone would switch over to Apple within months, if not weeks.

It'll take longer to disengage from the US dollar. But the countries at the sharper end of US sanctions such as Russia are stocking up on gold, while both China and India are clearly keen to make big advances in payment technology.

People have been talking about the demise of the dollar for a very long time. It's always been seen as a collapse a form of "just deserts" for overspending and decadence.

But the puritanical view is overly simplistic. Just as the eurozone won't collapse until Germany decides that the privileges it enjoys by using an undervalued euro are outweighed by the costs of maintaining it, so the US dollar could never collapse until the US decided that being global hegemon just wasn't worth the hassle.

That's where we are now. Trump is a symptom of that, not the cause. He's the leader that the US elected to tell the rest of the world that they can deal with their own problems. For now, the US may not realise what that will cost or it may realise, and be willing to pay that cost.

But one way or another, in the longer run, it spells a weaker US dollar. Why do you think Facebook is launching its own hybrid currency? Why do you think bitcoin still exists, despite its apparently chronic unsuitability to being used as an actual medium of exchange?

Our monetary system is evolving, which was always going to be the end-stage of the post-financial crisis era. What it will evolve into, we can't be sure. But you can certainly prepare for it by taking steps to insulate your portfolio.

I wrote about this in a lot more detail in an issue of MoneyWeek magazine earlier this year you can check out the story here. If you're not already a subscriber, get your first six issues free here.


Shrinking credibility leaves sterling resembling an emerging-market currency

Shrinking credibility leaves sterling resembling an emerging-market currency

UK monetary policy and the effects of Brexit are undermining confidence in sterling – it is increasingly resembling an emerging-market currency.
8 Jun 2022
What the UK’s no-confidence vote means for the pound

What the UK’s no-confidence vote means for the pound

Boris Johnson is to face a vote of confidence in Parliament after a group of Conservative MPs turned against him. Saloni Sardana looks at what it migh…
6 Jun 2022
Could a stronger euro bring relief to global markets?

Could a stronger euro bring relief to global markets?

The European Central Bank is set to end its negative interest rate policy. That should bring some relief to markets, says John Stepek. Here’s why.
24 May 2022
Despite the crypto crash, bitcoin still has a bright future
Bitcoin & crypto

Despite the crypto crash, bitcoin still has a bright future

Cryptocurrencies have crashed hard, with bitcoin down by more than 50% from its peak. But, says Dominic Frisby, bitcoin still has a future – it is the…
19 May 2022

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
22 Jun 2022
Gold has been incredibly boring to own – but that’s no bad thing right now

Gold has been incredibly boring to own – but that’s no bad thing right now

Stocks, bonds and cryptocurrencies have all seen big falls this year. But gold remains at its one-year average. It may be dull, but it’s doing what it…
29 Jun 2022