[Trump’s World] - Economics - "The Main Advantage of the Dollar is not Financial, but Political."

IM - Will American institutions withstand the pressure exerted by Donald Trump, or should we fear an unchecked consolidation of executive power and a shift toward illiberalism in the United States? How do you foresee the medium-term future of the MAGA movement?

Hugo Dixon - Everything will depend on the amount of power Donald Trump is able to wield: the more power he holds, the greater his capacity to cause disruption, both domestically and internationally. His authority fluctuates-his popularity waxes and wanes. He has lost support among some of the voters who backed him in 2016. The ideological battle within universities is far from over, and the economic outlook continues to darken as inflation worsens.

At the same time, Trump has scored some political coups, such as his dramatic show of force on immigration, including the deployment of the National Guard to Los Angeles in June. Yet he tends to overplay his hand, which may harm his presidential image. That Americans demand a firm immigration policy does not necessarily mean they want to see the military parading through the streets. Similarly, the intervention in Iran on June 21-22 has placed Trump in a politically awkward position. In the best-case scenario, it was a targeted operation that succeeded in destroying Iran’s nuclear facilities, which had the merit of rallying both hawks and isolationists. However, it’s also possible that the Iranian nuclear program remains intact-leaving Trump with two equally unappealing options: either strike again, alienating the isolationists, or refrain from further action, at the risk of letting Tehran rebuild its capabilities-thereby disappointing the hawks.

The United States is in a unique position: its Treasury bonds act as an unmatched financial safety net. By contrast, the exceptional measures introduced by Liz Truss in the UK were abruptly halted by the reaction of financial markets, leading to her resignation in October 2022. The U.S. has more room to maneuver. Nevertheless, there will come a point when that buffer snaps-at which point, in seeking to resolve this economic contradiction, Mr. Trump may attempt to drastically lower interest rates. He might succeed; he might be met with resistance from the Federal Reserve; or he might manage to bring the Fed to heel next year. Yet none of these outcomes will be easy, as the issue lies beyond the sole authority of the President. Even if he were to succeed, it would merely delay the problem. Sooner or later, reality will catch up, and the United States will have to find a way to finance its budget.

It’s much like the issue of climate change: eventually, the U.S. will have to pay for the cost of transition. Economic and institutional difficulties have merely been postponed. It is therefore reasonable to expect that Trump and the MAGA movement may lose their majority and that, in four years’ time, the country could see either a non-MAGA Republican or a Democratic president in office.

However, this does not mean that the United States will suddenly become a responsible actor in the international order, nor that the MAGA movement will disappear. We have seen similar patterns elsewhere: nationalist-populist parties win elections, retreat, and then return with renewed strength-this has been the case in the United Kingdom, where the Labour Party won a historic victory in the June 2024 general elections after fourteen years in opposition, only to see Nigel Farage’s Reform UK make a breakthrough in the May 2025 by-elections. A similar scenario unfolded in Poland, where the ultra-conservative Karol Nawrocki of the Law and Justice (PiS) party won the June 2 presidential election, despite the liberal coalition led by Donald Tusk having triumphed in the October 2023 legislative elections.

The incompetence of nationalist right-wing governments, once in power, does not guarantee that centrist forces will be able to offer a more compelling alternative. Public resistance and electoral pushback have been more immediate than expected, yet the Democratic Party seems largely unable to channel this protest energy into a coherent political project.

IM - All the more so given that the MAGA administration is doing everything it can to prevent a political alternation from undoing its legacy. Trump is consolidating his position in the Supreme Court, holds strength in the Senate, and is making numerous strategic appointments.

HD - That’s true. However, Trump also faces resistance from within his own camp: federal judges, no matter how conservative or right-leaning, remain committed to the rule of law. Although Trump himself appointed Justice Amy Coney Barrett in 2020, she is now widely denounced by the MAGA base as a traitor [she sided with the liberal justices in rejecting Trump’s final appeal in the Stormy Daniels case]. While the neoconservatives align with Trump, particularly on cultural issues, some still safeguard procedural norms.

We must therefore distinguish between different issues. On topics such as Medicaid, energy transition, tariffs, and immigration policy, Trump drives the agenda and rallies his supporters. But when it comes to undermining the rule of law, things become more complex. Yes, Trump is willing to bypass legal constraints-but he still fears the authority and prestige of the Supreme Court. It remains possible that the Court could support his unconstitutional reforms, but that is not what we are seeing at present.

The more decisive question will come in 2028: will they find a candidate capable of carrying a strong platform? Perhaps opposition alone will suffice; perhaps Trump will win again. That horizon remains far less predictable.

IM - Are we witnessing the beginning of the end for the dollar? Can it maintain its status as the world’s primary reserve currency? Are there credible alternatives?

Éric Chaney - Valéry Giscard d’Estaing once denounced the "exorbitant privilege" the dollar enjoyed by virtue of being the currency in which U.S. imports were denominated. The modern form of that privilege is slightly different: today, the dollar is the currency in which safe and liquid financial assets-U.S. Treasuries-are issued. These are assets that major global financial actors (central banks, sovereign wealth funds, pension funds) require as a safeguard in times of financial crisis. This status makes it easier for the U.S. to finance its current account deficit.

Today, some of Donald Trump’s economic advisors, such as Stephen Miran, chair of the Council of Economic Advisers, argue that the costs of this privilege now outweigh its benefits. This raises two questions. The first-whether the dollar is losing ground-is relatively easy to answer: no other economy in the world currently offers an alternative to U.S. Treasuries as the global reference asset. But the second question is more pressing: how will the balance of power evolve between the Trump administration and global financial markets? Will Trump eventually back down, or will he hold the line at the risk of a major financial derailment?

HD -The most probable scenario is a gradual decline in the dollar’s value, but not a fundamental challenge to its reserve currency status. The dollar still enjoys a considerable lead: it accounts for nearly 60% of global foreign exchange reserves, while the euro represents barely 20%. That said, the euro-already the second most-used currency globally-could gradually gain strength. "It is time for a ‘global euro,’" declared Christine Lagarde on May 26. But this would require a series of structural reforms, as she and the ECB have emphasized: capital markets union, consolidation of the single market, and the ability to issue joint debt to ensure greater liquidity. Yet even under optimistic assumptions, such developments would take at least a decade.

Moreover, the euro’s strength is contingent upon the EU’s geopolitical stability and its capacity to withstand external pressure-such as potential Russian aggression (for instance, what if the Baltic states were invaded?). One cannot entirely rule out the scenario of a eurozone breakup.

Furthermore, the dollar provides the U.S. with a key political-not just financial-advantage: the ability to turn sanctions into "offers you can’t refuse" Take Iran, for example. After the U.S. withdrew from the Joint Comprehensive Plan of Action (JCPOA), it unilaterally reinstated sanctions on Tehran, regardless of European opposition. The European Union will remain strategically constrained as long as the U.S. maintains monetary hegemony. Of course, the erratic nature of the current U.S. administration could eventually undermine this advantage. The underlying question is: how much weight can the American financial safety net really bear? Ten kilograms? A hundred? A thousand?

Éric Chaney - One could respond with this observation: the dollar’s power is ultimately dependent on others. The work of economists Pierre-Olivier Gourinchas and Hélène Rey has shown that the U.S. earns 2 to 3% more on its foreign investments than the rest of the world earns on its investments in the U.S. This is the privilege of being a reserve currency: the country can finance its deficit through inward investment-Stephen Miran’s explanation for the dollar’s overvaluation.

But there is a flip side. In the event of a global financial crisis, the decline in global equity markets coupled with a surge in the value of U.S. Treasuries can result in massive losses for the U.S.’s net international investment position.

IM- Let’s turn to China: does Donald Trump stand his ground, or does he always back down in the end?

HD - Ah, the famous TACO question-Trump Always Chickens Out! Does Donald Trump always retreat? I would say: more often yes than no, but that doesn’t mean he rules out the use of force. Just recall the case of Iran. One must also consider the hawks within his administration, who are even more uncompromising when it comes to China.

The decline of American power does not necessarily benefit other countries; in many ways, they are also losing strategic latitude. Trump has ultimately shown reluctance to escalate confrontation-cautious with China, and to a lesser extent with Canada and the European Union. And perhaps Mr. Xi, too, will adopt a TACO posture. The real question is not whether Trump backs down, but rather what impact his initial aggressions and subsequent retreats have on others.

IM- Is a coalition of middle powers conceivable? Can we envision a functioning multilateralism without the United States? 

HD -The idea of building a new world order entirely without the United States is likely unrealistic, or at least extremely difficult. But that shouldn’t stop efforts from moving forward in parallel, in anticipation of the day the U.S. might regain its senses-should that day come. The goal is not to return to the America of the past, to the Biden era, but to develop a more effective form of multilateralism-one that includes the U.S. without relying on its hegemony. And if we are to have a hegemon, it is still preferable that it be Washington rather than Moscow or Beijing.

This vision is possible, but it rests on three essential conditions:

1. The European Union must build strategic autonomy and develop its own defense capabilities.
2. Western allies must strengthen ties and coordinate foreign policy-this includes the United Kingdom, Canada, and others.
3. Engagement with key Global South countries is critical-excluding China. At the most recent Council of Europe meeting, Ursula von der Leyen announced the EU’s intention to join the Trans-Pacific Partnership (which, since 2016, includes several Asian and American countries). But this is not enough: many Global South countries remain excluded. The EU should also engage with Mercosur, broader Asia, Turkey, and other parts of Europe-creating as wide a zone of peace and prosperity as possible.

The focus should not be solely on trade, but also on financial integration and global challenges like climate change. And the U.S. or China should not be excluded by default: Europe-and middle powers more broadly-still need to cooperate with these larger actors. Perhaps it would be impossible to collectively prevent a U.S. invasion of Venezuela, if such a scenario arose. But middle powers may yet be able to create broad areas of peace and prosperity.

IM - Should this be done issue by issue, or should we adopt the French approach of forming systematic coalitions?