The End Of Privilege - Has The Dollar Peaked And Can The Euro Replace It

Forbes

a day ago

A bunch of American dollars banknotes (1$), US, circa 1985. (Photo by)
In the last week, I have fielded questions from audiences in Frankfurt and Dublin on the net effect of Donald Trump's economic policies on investment portfolios. Such is the day to day rhythm of policy chaos that many investors likely overestimate the effect of Trump on markets, and the oddity is that as I write, US equity and bond markets are at roughly the same levels they traded at in March….though investor confidence has taken a battering.
Indeed, the luxury of financial markets is that some of the risks that Trump has unleashed can be hedged, whereas it is harder for societies, economies, and the body politic to offset the implications of his behaviour on foreign direct investment flows and the quality of political debate for example.
From an investment point of view, I term the net effect of Trump on portfolios as 'The End of Privilege' which is to say that the idea of US assets in general and the dollar in particular befitting from what Giscard d'Estaing had famously referred to as 'exorbitant privilege' is coming to a slow end. In concrete terms we can expect investors to question the role of US Treasuries as a safe haven, and for the dollar to slowly weaken (from a very expensive level) over time.
The set of economic policies that Trump is pursuing are confusing and damaging to long term American growth and the fabric of its society (his 'big, beautiful' budget bill will disproportionately favour wealthy over poorer households). Moreover, any sense of accountability has been snuffed out and corruption is shamelessly creeping into public life (Evan Osnos' article in the New Yorker on this topic is excellent). In short, America risks taking on the economic traits of a badly run emerging economy (look at how the Turkish lira and bond market have performed in the past five years as an extreme comparison).
To take the long view, Trump has decisively smashed the Bretton Woods system that had elevated the US financial system to be first amongst equals. The Bretton Woods conference was a tussle between Britain and America to shape the new world financial order and with it, bodies like the IMF. The US was very much the winner, and effectively the meeting formalised the transfer of 'world power' from Britain to the US, or as Keynes (Britain's chief negotiator) wrote to his mother 'In another year's time we shall have forfeited the claim we had staked out in the New World and in exchange this country will be mortgaged to America'. Keynes job was to negotiate a deal for Britain that would rescue it from 'losing face altogether and appearing to capitulate completely to dollar diplomacy.'
From this point onwards, American financial dominance grew, manifested in the broad international use of its currency which has risen to a very particular place as the linchpin of the financial system. Indeed, one of the most important tenets of the twentieth-century world order and the rise of globalization has been the position of the dollar as the international reserve currency.
The dollar has become so important to the financial system, that two economists (Pierre-Olivier Gourinchas and Hélène Rey) have taken the notion of 'exorbitant privilege' a step further in a relatively recent paper, and introduced the idea of 'exorbitant duty', which refers to the role that the dollar and US financial system play in times of crisis as the provider of a safe haven, even when those crises emanate from the US itself. Alarmingly, there is a section in the trump budget (sec. 899) that permits the administration to tax holders of US assets in certain circumstances, which can only erode confidence further.
The question then is which assets and currencies stand to benefit from a less 'privileged dollar'. First, my sense is that when something goes wrong in emerging countries like Turkey, capital flows to countries like Switzerland (simply because much of it is held by a small number of individuals). As far as much greater institutional flows are concerned, the obvious destination should be the euro-zone. But, this is not the case. At the end of 2024, I spent a week in Singapore and also the UAE and was surprised by the number of investors who considered the euro-zone as barely investable, this might reflect some ignorance on their part, but it is also redolent of a greater problem of international credibility for the euro-zone.
In that context I was interested to see that Christine Lagarde, the president of the ECB gave a very good speech on currencies in Berlin on Monday 26th, entitled 'Earning Influence – lessons from the history of international currencies'. In the speech she noted three properties of dominant currencies – they are issued by large economies (zones), they have deep pools of financial assets which foreigners can buy and they are backed by sound legal systems.
There are two important contemporaneous facets to the speech – the first is the expectation that the actions of the Trump administration will structurally weaken the dollar and the second is the very grown-up admission by the ECB president that the euro-zone (Bulgaria will become a member in 2026) has failed to deepen its capital markets and become the provider of safe assets in an increasingly unsafe world.
The backdrop to these comments is a renewed push by the euro-zone on capital markets union, or the savings and investment union (SIU) as it is now called. In essence it has three components – single regulators across EU financial services, the creation of poles of expertise in different EU financial capitals (i.e. Amsterdam is the equity hub, Paris is where PE is, etc) and the sanctioning of retail savings and pensions flows into private assets.
In many respects, SIU is a strange phenomenon – a policy critical to the future of Europe that most Europeans have very little attention span for (who would blame them). Apart from the releasing of hundreds of billions of euros in German savings banks for example, into private and private investments, what Europe also needs is a structural shift in the appetite for risk. For that to happen, we might need a European Donald Trump.