Will Trump 2.0 destroy the dollar hegemony? Nomura: The risk of rising U.S. Treasury yields far outweighs the risk of a significant depreciation of the dollar

"Will Trump 2.0 destroy the dollar hegemony?" Nomura believes it is unlikely, but U.S. Treasury bonds may be "a bit dangerous."

With Trump's return, the market is concerned that his "America First" policy may further weaken the dollar's status as the global reserve currency, exacerbating the "modern Triffin dilemma."

The core of this dilemma lies in the fact that the U.S. needs to simultaneously meet the growing global demand for safe dollar assets while ensuring the long-term safety of these assets.

In a research report released on the 13th, Nomura stated that as U.S. external liabilities rise sharply, the safety of dollar assets is being questioned, and foreign investors may demand higher returns, which would push up U.S. interest rates.

Nomura stated, in the long run, the risk of rising yields on U.S. long-term bonds seems to be much higher than the risk of a significant depreciation of the dollar, although the latter cannot be completely ruled out.

The "Excessive Privilege" of the Dollar and the Triffin Dilemma

Nomura pointed out that the dollar, as the global reserve currency, gives the U.S. an "excessive privilege." The enormous global demand for safe dollar assets allows the U.S. to borrow at low costs and benefit from it.

However, this privilege also comes with challenges, namely the "Triffin dilemma."

The "Triffin dilemma," proposed by Belgian-American economist Robert Triffin in 1960, describes the inherent contradictions in the international monetary system. Specifically, when a country's currency is widely used as an international reserve currency, that country needs to continuously increase the money supply to meet global demand, which may lead to the depreciation of that currency and a crisis of confidence.

Triffin pointed out that this contradiction would ultimately lead to the collapse of the monetary system.

Nomura's report shows that since the 2008 global financial crisis, U.S. external investment liabilities have rapidly increased. By the second quarter of 2024, U.S. external liabilities had grown from $9.5 trillion at the beginning of the crisis to $30.9 trillion, exceeding 106% of GDP.

Nomura analyzes that about half of this growth comes from new foreign investment, while the other half is due to the valuation increase brought about by rising prices in the U.S. asset market.

The Populist Policies of "Trump 2.0": A Threat to Dollar Hegemony

Nomura's research specifically points out that after Trump's re-election, his "America First" policy may lead to larger fiscal deficits and higher inflationary pressures, further widening the U.S. external debt level.

Trump's policies include increasing tariffs on foreign investments, restricting immigration, and increasing fiscal spending. These populist policies may exacerbate internal imbalances in the U.S. economy, reducing the attractiveness of dollar assets.

Although the dollar remains the global reserve currency, its status will be somewhat weakened Nomura analysis indicates that although the dollar still accounts for 58% of global foreign exchange reserves, global investors' confidence in the dollar has been shaken, especially in recent years, the instability of the U.S. Treasury market has led some foreign institutions to pay attention to the demand for higher risk premiums.

The Risk of Rising U.S. Treasury Yields is Greater

Nomura expects that in the coming years, the risk of rising yields on U.S. long-term government bonds will be greater than the risk of dollar depreciation.

This is because, although foreign capital may increase the risk premium on dollar assets, the United States still possesses strong economic and military advantages, making it difficult for the dollar's status as a reserve currency to be replaced.

Moreover, the independence of the Federal Reserve means that even if policies implemented by Trump lead to rising inflation, the Federal Reserve still has the ability to control inflation through interest rate hikes and maintain the attractiveness of dollar assets.

Additionally, although currencies like the euro were once seen as potential alternatives to the global reserve currency, they fall short in terms of liquidity, transparency, and other aspects, making it difficult to shake the dollar's global hegemony.

Currently, there is no currency that meets all the conditions to replace the dollar internationally, which also means that the dollar's dominant position is unlikely to undergo a disruptive change in the short term.

Nomura's conclusion is that the likelihood of a large-scale sell-off of dollar assets is low at present, therefore, in the coming years, the risk of rising U.S. long-term bond yields seems to be much higher than the risk of significant dollar depreciation, although the latter cannot be completely ruled out