Euro is the Only Alternative to Dollars

What happens if Trump continues to undermine stability of the US dollar? Gradually, euro will start to take the place of the dollar as reference currency and safe place for your money in case of risk.

‘It’s almost like being extorted by a delinquent’

Japanese opposition lawmaker Shinji Oguma from the Constitutional Democratic Party sharply criticized Trump’s tariff policies, calling them 'extortion' in a statement at the foreign trade committee of the Japanese parliament, the Diet, on 19 April.

If you give in to what they are saying, claiming it is a negotiation, or a deal, and if Japan gives in, it sets a bad precedent. If you give money to someone extorting you, they’ll just come back for more. I don’t think retaliatory tariffs, like China does, are a good approach either. But we need to take a firm stance.

With that in mind, we must respond firmly. Japan should not act alone to seek exemptions. We need to fight together with other countries. Do not provide unnecessary information, do not offer concessions.

Oguma warned of the risks posed by Trump’s aggressive trade agenda and urged Japan's ruling party to resist America's demands. The remarks come after the first round of US-Japan talks, where trade and security ties were discussed in light of Trump’s attempt at reshaping international trade.

Shinji Oguma talking in the Committee. Still from Parliament video

In an international initiative led by Canada’s PM Mark Carney - Doctor (DPhil, Oxford) in economy and former Governor of the both the Bank of Canada and the Bank of England - it seems that an alliance has formed that is imposing the full weight of their economies on the Trump administration. This informal alliance of Canada, EU and Japan has made Trump feel, in very real terms, what it will mean if the market abandons US treasuries as a safe haven. By selling larger than usual US treasury bonds, they simultaneously pushed the dollar down and the interest rates up which is a strong signal of instability to the market.

Trump is not - and no one in his cabinet are, either - a match for Canada’s PM or for any of the Governors of central banks of US trading partners. Trump has no idea and it will be a sad sight, of him trying to wriggle out of the mess he has created.

It is already happening - the dollar is falling in value against other currencies, especially the euro. Not a problem in itself, but all the turmoil and mercurial back and forth of Trump’s tariffs means that investors very quickly are losing confidence in the American economy as a gold standard for the rest of the World. In particular, when Trump insistently continues to voice his dissatisfaction with federal chair Jerome Powell, the financial markets get really fearsome that interest rates in the US at some point will be decided politically rather than sound economical reasoning. Once this happens, investors will finally abandon the US market because they lose confidence in stability of the US financial market.

USA is in a league of itself, but increasingly moving towards analogues like Turkey recently, Argentina over several rounds in earlier decades, even Truss in UK - all failed because they tried to impose their agenda over free markets and were basically voted out by the market - confidence and interest rate, basically. It is one power that all leaders must fear. For the last 70 years, US has enjoyed a unique position in global financial markets, thanks to its overwhelming leadership in trade liberalization, military power, and technological innovation. But Trump is undermining it and it is being challenged from the outside, by fear of it failing in resilience.

The firm belief in American exceptionalism, that US is in a league of its own, is one of the important factors behind Trumpism. This belief was further strengthened after the fall of the Soviet Union and during the ensuing era of globalization, which is now coming to an end. However, Trump is learning the hard way that US still is in a reciprocal relationship with mutual dependencies. Especially because Trump has never grasped the concept of debt. He has always been bailed out by someone else, or has extorted someone to bail him out, rather than paying off.

Right now, there are nobody standing by, eager and willing to bail out Trump and the US economy, if and when interest rates on government bonds go up while the dollar falls so much that a default on payments looms. It is such a big deal that the usual intervention from IMF will not suffice in size, so it will take an extended effort from many parties to figure that out. Setting aside the obvious reluctance of all the many partners, friends and foes that Trump has managed to insult, the objective of serving mutual interests will have to take over. IMF always demands an austerity regime in the defaulted country, with increased taxes (including on the rich) and cuts to government spending, including subsidies to private companies and military expenditure.

Euro may take advantage of the dollar’s erosion

For more than a decade, the euro’s share in global foreign exchange reserves has been around 20%. US dollars have been around 58%, those two followed by Japanese yen with 6% and UK pounds 5%. Chinese yuan are by now 2% after having been closer to 3% for a couple of years. This may change - albeit slowly because of all the caution needed when dealing with government finances of this scale. With US policy-making now undermining the dollar and Europe potentially getting its act together, the euro may start to gain ground as an international reserve currency.

One of the changes on the European side is Germany’s large fiscal stimulus (debt brake reform) on defense and infrastructure, already passed in the Bundestag and supported by the huge debt-based support package agreed by the EU countries in unison. Germany’s growth prospects are improving, and the economic gains from higher infrastructure and defense spending will start to filter through in 2026 and 2027.

German federal treasury bonds, called Bund, got higher yields and investors find the Bund attractive, pending how well the EU finances are developing. EU is still working on the single market for financial services, the capital markets union. It has to be one of the primary goals to get that in place in preparation for an uptick in interest for euro as a foreign reserve currency.