Home of global capital? Investors run from Trump's America

The Age

07-05-2025

The dollar's sensitivity to the trade policies is rational. For most of the past 80 years, the greenback has been central to global trade and financial activity. It has been the world's reserve currency and a key facilitator of the increasing globalisation of trade and finance over that period.
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The US has benefited from its currency's role, with inflows of foreign capital enabling Americans, including the government, to pay lower interest rates on their debts than might otherwise have been the case.
The dollar's status has effectively provided the US with unlimited currency reserves, removed any threat of a balance of payments crisis or a default on its debts, and let America and Americans borrow cheaply and live beyond their means.
It has allowed US governments to pile up debt of more than $US36 trillion ($55.4 trillion) – almost 100 per cent of America's GDP – without, until very recently, any of the buyers of that debt questioning its ability to repay it or expand deficits and debt even further.
Bessent talked about solidifying America's place as the home of global capital, but that is what it has been for much of the post-war period – until Trump regained office.
The Trump administration, by trying to blow up the post-war order and the multilateral institutions that support it with 'America First' policies, is making even its long-term allies (all of them on the receiving end of Trump's tariffs) question whether they can trust America, and whether it's still a safe and attractive place to invest.
It hasn't helped that the introduction of Trump's tariffs has been shambolic, with their design changing almost on a weekly basis, with exemptions and pauses when easily foreseeable – but to the administration, unforeseen – unintended consequences emerged. This administration has, thus far, lacked basic competence.
Neither does it engender any confidence outside the US that important policies are suddenly sprung on them (and, it seems, the senior members of the Trump administration) via very unpresidential, semi-coherent, posts by Trump on his Truth Social platform at all hours of the day or night.
The administration is driving the US economy towards a recession, and policies that are supposed to generate a revival of the manufacturing industry in America are – because US companies have been at the forefront of globalising their supply chains – already causing significant damage to US companies even before they face retaliatory trade barriers elsewhere.
That's hardly a recipe for solidifying America's appeal to global capital providers.
There's been a lot of discussion about whether China might respond to the 145 per cent tariffs Trump has slapped on its exports (in a fit of pique after China responded to earlier tariffs with tariffs of its own) by dumping the $US760 billion or so of US Treasury bonds that it holds as part of its $US3.2 trillion of US dollar denominated reserves.
It won't do that – its losses would be huge if it did – but, since the US-led G7 froze more than $US300 billion of Russia's dollar-denominated reserves after Russia invaded Ukraine, there has been a notable acceleration in the rate at which China has been running those holdings down. China had around $US1 trillion invested in Treasuries before the 2022 invasion.
There have been reports from within China that flag a continuation of its strategy of incrementally reducing the exposure to US markets and diversifying its reserves, which would appear the rational course. China has trebled the share of gold in its reserves over the past three years.
Japan is the biggest holder of US Treasuries – about $US1.1 trillion of them – and its finance minister, Katsunobu Kato, raised eyebrows recently when he described the holdings as a 'card' to play in trade negotiations with the US.
'It (the bond holdings) does exist as a card,' he said. 'Whether or not we use that card is a different decision.'
Days later, he said Japan was not considering the sale of Treasuries as 'a means of Japan-US negotiations.'
China and Japan might not dump their US reserves but, with US deficits and debt projected to soar over the next decade – Washington's Committee for a Responsible Federal Budget has said the Republicans' 'big, beautiful' new budget bill now working its way through Congress could add $US5.8 trillion to US deficits over the next decade.
The US dollar dominates because there is no rival, very liquid, freely-trading currency backed by the world's deepest financial markets and, until Trump started issuing executive orders that appear illegal and unconstitutional, a trustworthy legal system.
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China has none of the preconditions for turning its yuan into a reserve currency. It controls the flows of capital, it intervenes in the market for its currency, its financial markets are shallow by comparison with America's, its legal system is opaque, and its economy is intensely regulated and centrally directed.
The European Union does have a free-floating currency, trusted legal systems and doesn't control the flows of capital, but it's a collection of individual economies and financial systems and governments that issue their own debt.
If there were a single issuer of eurozone debt, backed by the economies of all EU members, it could potentially challenge the US dollar as an alternate reserve currency. Certainly Trump, with his war on global trade and institutions and tariffs on the EU economies, is providing motivation and opportunity.
It would, however, take years of economic, financial and regulatory reform for the euro to displace the US dollar and the history of the EU says that it is extraordinarily difficult, indeed near-impossible, to get a consensus for ambitious reforms.
Bessent, with a boss who makes up policy on the spot – witness the bizarre announcement of a 100 per cent tariff of movies made outside the US that the administration is now trying to talk down – is doing his best to present the US trade agenda as part of a well-considered grand plan.
Most outside Trump's MAGA movement see it as wanton self-destruction that will damage the US economy, undermine the place of the US dollar at the heart of global economic activity and permanently diminish America's role in geopolitics and global trade.