Why 'TACO Trump' (who Always Chickens Out) could be the death of the dollar: ALEX BRUMMER
Donald Trump’s retreat over Greenland may have come too late to reverse growing global disenchantment with the American dollar as China and other holders of US currency reserves continue dumping or running down their exposure to the greenback.
Ever since the ‘Nixon shock’ of 1971, which ended gold backing for the dollar, the US has enjoyed the privilege of having the world’s reserve currency.
It has not had to worry too much about the size of its budget deficit, or the alarming build-up of debt, because foreigners from Beijing to Frankfurt have been willing to hold dollar securities or bonds, known as US Treasuries, in their official reserves.
Similarly, US bonds have provided a vital layer of capital at the world’s biggest banks and are seen as a safe haven for fund managers. But now the dollar finds itself under siege. Trump’s tariff battles with friends and foes alike, his unrelenting attacks on the independence of the Federal Reserve and his mercurial national security policy have unsettled governments and traders.
As a result, the dollar is tanking on foreign exchange markets. It fell 15 per cent in the first half of last year in response to the President’s ‘Liberation Day’ tariffs.
He did eventually reconsider the policy – leading some on Wall Street to adopt the phrase ‘TACO’, or Trump always chickens out, to describe his tendency to back down on his threats.
But the past 12 months have not been kind to the dollar, as it fell 11.5 per cent against the euro and 10 per cent against sterling.
And the yield on 30-year US bonds is now 0.35 of a percentage point higher than when Trump secured his second election victory in November 2024, with the higher cost paid by the US to borrow money reflecting growing distrust among global markets about America’s ability to pay its debts.
Donald Trump at the World Economic Forum in Davos, Switzerland last week
It might have been expected to move in the opposite direction given the Federal Reserve has cut its key interest rate three times since Trump took the oath of office.
Meanwhile, European disenchantment with American assets has been fuelled somewhat ironically by Deutsche Bank, which for many decades was Donald Trump’s go-to bank for his US property operations.
In a recently published note, the bank’s foreign exchange strategist highlighted that Europe holds $8 trillion (£6 trillion) of US bonds and equities. So while America may have the military might, Europe could turn the tables as the biggest lender to the US.
It prompted a fierce response from US Treasury secretary Scott Bessent, who claimed that Deutsche Bank had called him to disavow the note.
Bessent is best known in Britain as the trader, working for George Soros, who bet against the Bank of England in 1992 – when the pound was ejected from the Exchange Rate Mechanism – draining the UK’s currency reserves.
As a result, he knows more than most about how easily the tide can turn against a currency.
US Treasury data shows that European states hold far greater amounts of American debt than China, giving them a ‘big bazooka’ to fire in the event of a breakdown in transatlantic relations.
Some European investors, notably Denmark’s largest pension fund PFA, have also cut their dollar exposure. PFA argued this was a normal part of risk management. But it is hard to believe America’s designs on the Danish territory of Greenland were not on the agenda.
The UK, Belgium, Luxembourg, France, Ireland and Norway collectively hold $2.84 trillion in US Treasuries, equivalent to 30 per cent of the whole market. Trump may be contemptuous of Europe’s contribution to Nato, but the President treads on thin ice when he threatens economic warfare.
Disaffection with the dollar has also spread beyond the Continent.
For several decades, as it deepened its domination of world trade, China’s chosen currency for its reserves was the greenback.
US Treasury secretary Scott Bessent speaks with President Trump. Bessent knows more than most about how easily the tide can turn against a currency - he is is best known in Britain as the trader who bet against the Bank of England in 1992, draining the UK’s currency reserves
It was an obvious choice because of its liquidity and the commercial reality that almost all global commodities, including oil and gas, are priced in the dollars.
It also commands a high level of trust as – in times of financial stress such as the Great Financial Crisis of 2008 – the Federal Reserve is expected to stand behind the currency.
But Trump’s tariff war with Beijing and frayed diplomatic relations have fractured that confidence. Precise holdings of US dollars by Chinese banks and funds are not easy to obtain. However, changes in the holdings of official reserves are pronounced.
Reports suggest China has dumped 40 per cent of its dollar assets since Trump arrived in the White House last January, reducing them to a modest $682.6 billion.
Instead, China is now the driving force behind a global gold rush, converting dollars into bullion for 14 months in a row, helping to drive the price up 63 per cent over the past year.
Global liquidity, the ability of world trade to function, demands the dollar remain the world’s preferred reserve currency. There is just not enough gold to fill the gap.
The baleful experience of the ‘gold standard’, when a currency’s value was fixed to a specific amount of gold, constricting international output in the 1920s and 1930s, ultimately leading to the Great Depression and is also deeply embedded in global economic folklore.
Despite this, the dollar is not invulnerable – and an eccentric and increasingly authoritarian US President may be inadvertently sowing the seeds of its destruction.
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