Bow or burst for the US dollar

It seems that some heads of government hardly care about international rules and agreements. Although there is no one to call them to order, the consequences are being felt in the currency world.

International politics has become a lot less boring in recent years. Good consultation is increasingly giving way to the law of the strongest. Or the boldest. In the schoolyard, the master had immediately intervened, but on the world stage there is no one with enough authority to really call leaders to order. A good example is Donald Trump. It is holding on to the increased tariffs on hundreds of billions of dollars worth of Chinese goods, despite the World Trade Organization (WTO) ruling this week that the measure is illegal.  

British Prime Minister Boris Johnson also seems to have little interest in mutual agreements. The British Prime Minister recently guided the so-called Internal Market Act through the House of Commons. This allows him - in violation of international law - to reverse certain parts of the signed Brexit deal. Johnson chooses a spicy moment for that, as the negotiations with the EU are approaching a boiling point. For now, however, Trump's antics are having much more of an impact on the currency markets.

quirky course
At first glance, the WHO ruling has little impact. The organization lacks the ability to impose penalties. In addition, the United States can appeal and prolong the process. If the trade dispute with China flares up again due to the WTO ruling, it could even boost the dollar. Many parties opt for the safety of the US currency as soon as the tension in the financial markets rises.

In the long run, the picture looks different. Trump's protectionism is certainly not good for international trade, which is largely settled in dollars. If the United States sticks to the wayward rate, the barrier for other countries to switch to alternative currencies will be lowered. For example, China has been trying for years to advance the renminbi as an alternative to the dollar.

Challenger of the dollar
For the time being, the Chinese strategy has hardly been successful. Admittedly, the coin was given a place in the IMF's Special Drawing Rights in 2016. That was mainly a symbolic move. An initiative to trade oil futures contracts in renminbi turned out to be a disappointment 2 years ago. And the currency is involved in less than 10% of all international trade, compared to almost 90% for the dollar.

If there is one currency that can benefit from declining dollar popularity, it is the euro. Its share of world trade is more than three times that of the renminbi. The way in which European countries manage to set aside mutual contradictions in the fight against Covid-19 and in the Brexit negotiations also shows that Europe is less divided than you think. Who knows, in a few years' time it will turn out that the recent euro rally of more than 10% against the dollar was only the beginning of a much larger movement.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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