There’s a well-known – by now hackneyed – line in critical theory circles: “it’s easier to imagine the end of the world than an end of capitalism.” What is historically contingent can, over time, take on the appearance of necessity. At the same time, many of us can easily imagine a disruptive shock, a sudden rupture, even if we hope optimistically against it.
Until recently, it was commonly assumed that a major loss of confidence in US Treasuries would be apocalyptic, an indicator of catastrophe so great that bank balances would be the least of anyone’s concerns. The collapse of the global financial order, it seemed, would take nothing less than nuclear war or an extinction-level comet from outer space.
In the end, all it took was an oversized carboard chart with equally oversized tariff numbers, for investors to sell off the traditionally safest of safe haven assets. 10-year Treasury yields have subsequently (at the time of writing) fallen, but analysts worry about what the moves mean. Former Treasury Secretary Janet Yellen, for instance, warned that the market reaction reflects “a worrying drop in confidence in American policymaking.”
Dollar doldrums?
What is the evidence for the declining confidence hypothesis? In part, it’s the concurrent weakness of the US currency. As The Economist explains, “if bond yields were rising because of stronger American economic growth, they would bring about a stronger greenback. That the dollar is falling instead suggests investors are worried about America’s economic stability.”
The Economist also points to concerns that go beyond economics, arguing that recent actions by President Trump have undermined the political norms on which American society and its institutions are built. This erosion of confidence, they suggest, extends to the financial system itself.
An RBC analysis suggests, by contrast, that ‘deglobalisation’ has been a real trend for some. On this analysis, a challenge to USD’s status as the global reserve currency is not a sudden shock but part of an emerging process.
However, they argue that “given the US’s increasing willingness to flex its economic might, we would be surprised if countries did not seek to better balance their own internal supply and demand, reducing reliance on the US consumer.” And the bank sees “a real possibility that tariffs and their impact on international trade prove to be the driver for rethinking reserve strategy.”
Supreme for now
Plausibly, the current US trade policy will reshape the global economy in the coming years. But some perspective is needed. As Robert Armstrong suggests in the FT, “it is too early to declare that the supremacy of the dollar is ending, and that Treasuries will never again hedge risk, or that US equity outperformance is a thing of the past.”
And Steven Kamin points out that during the recent tariff turmoil “the dollar has stopped acting like a ‘flight-to-safety’ currency”, we need to bear in mind that the “pre-eminent role of the dollar in trade, international finance, and reserve holdings is hard-wired in place by network effects, institutionalised practices, and the lack of viable alternative currencies, and it will take time for them to erode.”
Still, in this climate of uncertainty, traders are keeping a close watch on any shifts, however temporary, away from US assets. Consider, for instance, that non-US investors currently hold approximately $30 trillion in Treasuries, around 30% of the total. Meanwhile, the dollar has weakened, and the euro is gaining traction to investors looking for safe assets.
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