King dollar’s reign looks secure — for now

"Liberation Day" is barely a fortnight ago and the jolt is taking its place in the annals of modern history. Comparisons have been drawn with Richard Nixon’s abrupt decision in 1971 to end the system of fixed exchange rates that prevailed for a generation. Diplomats and investors were appalled. The dollar's time as the anchor of world commerce was coming to a close — or so a popular narrative has gone.

Nixon's unilateral action was shocking. His team was rightly accused of arrogance and bullying — as U.S. President Donald Trump is now with the punitive tariffs he imposed this month. Then, as in the past two weeks, it was popular to pronounce the upheaval as presaging the demise of dollar dominance. Certainly, American prestige has taken a hit. The dollar is being pushed lower by traders and U.S. Treasuries, a pillar of the postwar financial setup, have been roiled.

And yet, not so fast. The end of Bretton Woods didn't bring the U.S. currency down, though it did have a rough few years. Nor did Japan's rise, the subprime meltdown or other ructions. It’s fine for the dollar to lose ground against the yen-euro or Australian dollar for a while; it's weakened versus every major currency since the end of December. Trump's actions will hurt the American economy: Forecasts of recession have increased since April 2. The critical question is whether the dollar is now set on a course of long-term decline or whether we are witnessing just another healthy FX market correction. The distinction often gets blurred. Remember in early the 2000s when burgeoning current-account and budget deficits were said to herald ruination for the dollar? Those days seem almost quaint.

So how will we know when — or if — it's the real thing? For starters, don't predict any demise in the foreseeable future, says Paul Blustein, author of the recently published book King Dollar: The Past and Future of the World's Dominant Currency. The greenback survived Trump's first term at the pinnacle and will likely endure his second. Something truly disastrous would have to happen. Blustein doesn’t believe it would be inherently bad for the dollar to be not quite so towering. For one thing, it might subtract from the ability of a U.S. leader to strong-arm allies and threaten to invade them.

Was April 2 bad enough? Not yet, apparently. "It isn't quite brazenly irresponsible and catastrophic enough, not because it isn't brazenly irresponsible and catastrophic; it sure as hell is,” Blustein told me from his home near Tokyo. "I do not mean just are people thinking about Treasuries as a safe haven or the obligation of a government that is competently or safely run. I am talking about dominance in terms of a currency used far more than any other in all sorts of international commerce.”

The advantages of incumbency are so significant and would-be rivals have too many important drawbacks, that the dollar looks impregnable. The metrics are impressive: It involves the bulk of FX trading and a disproportionate amount of invoicing. Many loans are denominated in the U.S. dollar, and while its share of global reserves has slipped, it's head and shoulders above any other. And in the crucial currency swaps market, the dollar's sway is unrivaled, something Blustein places great store in.

He includes a useful anecdote about John Connally, one of Nixon’s four Treasury bosses. Connally was indignant during a discussion about the poor reception the end of the link between the dollar and gold would receive among allies. Who cares what they think; there's not much they can do, he recounts Connally saying. It's not far from the Trump team's view of trading partners and their need to negotiate during a three-month tariff pause.

(Connally’s other great claim to fame came during his time as Texas governor. He rode in the limousine with John F. Kennedy on the day the young president was slain in Dallas. Connally was wounded.)

Perilous times, certainly. Is it entirely natural for traders to bid the dollar lower relative to peers? Sure. Does it mean the end of the U.S. currency as the lynchpin of contemporary capitalism? There have many false starts. We’ll need a lot more than 90 days to answer.