The expression of “King Dollar” has long referred to the U.S. dollar’s dominance as the world’s reserve currency going back to the end of World War II and is the most widely used currency for international trade. Today, roughly 80% of global oil trade is settled in U.S. dollars, with Russia and China utilizing other currencies. Sanctions and tariffs that the United States has levied on Russia and China are resulting in other countries opting for alternative currencies for trade as a way of insulating themselves from the effect of current and further sanctions and tariffs.
“This is something other countries are increasingly concerned about,” William Jackson, chief emerging-markets economist at Capital Economics, told The Wall Street Journal. “Some are seeking to reduce their risk of possible sanctions on the use of dollars in trade. China is trying to act as a geopolitical counterweight.” It was reported that, as of the end of 2023, the Chinese yuan had become the fourth most popular currency for international oil settlements, overtaking the Japanese yen and highlighting the increased trading activity between Russia and China.
While the possibility of the petrodollar becoming less influential can’t be entirely dismissed, it’s unlikely to happen anytime soon. For now, talk of a petrodollar collapse is far-fetched. While U.S. dollar holdings have fallen significantly over the past few decades, it remains the world’s top reserve currency, with no real rival in sight.
According to the International Monetary Fund, in the first quarter of 2024, the U.S. dollar accounted for about 58% of allocated currency reserves. That’s significantly more than the reserves held in euros (20%), Japanese yen (5.5%), British pound sterling (4.9%) and Chinese renminbi (2.6%).
Before the election, the U.S. Dollar Index (DXY) was on the verge of a technical breakdown as forex and currency traders became more concerned about the growing size of the Treasury Auctions to finance the federal budget and soaring interest on the federal debt that has now topped $36 trillion.
Just prior to the election, around the beginning of October, the dollar began its torrid rally when it became clear the Fed was considering a less aggressive monetary policy to ease interest rates, with the U.S. economy showing solid growth, which supports the dollar. Interest rates ticked back up from the September low when the benchmark 10-year Treasury yield rose from 3.60% to 4.50% in mid-November. Additionally, geopolitical tensions are ramping up, with the latest attacks by Ukraine on Russia using U.S.-made missiles increasing the demand for the dollar as a safe-haven currency.
And then there is the political factor of the re-election of Donald Trump and his proposed polices, such as the broader use of tariffs, leading to expectations of reigniting higher inflation resulting in fewer rate cuts by the Fed. “It’s hard to short the USD right now,” given that investors are also increasingly weighing the possibility that the Fed might not cut rates next month after all, said senior market analyst Matt Simpson at City Index. That sentiment was driven by sharp swings in market pricing, which currently sets the odds of a Fed rate cut at its December meeting at just under 53%, down from 72% just a week ago, according to CME’s FedWatch Tool.
But there is also a growing case that the newly created Department of Government Efficiency (DOGE) is going to take a blow torch towards the bloated federal bureaucracy to eliminate $500 billion in fraud and $2 trillion in spending by July 4, 2026, when America celebrates its 250th birthday. Vivek Ramaswamy defended the cuts on X, saying, “Over half a trillion dollars of taxpayer funds ($516 billion+) goes each year to programs Congress has allowed to expire. There are 1,200+ programs that no longer have authorization but still receive appropriations. This is totally nuts.”
It is as if the American taxpayer is getting a wake-up call as to how unscrupulous the federal government has been with our hard-earned tax dollars. The following articles lay out some of the egregious spending that has gone on for decades.
Some examples of which include:
Dead people mistakenly received $1.3 billion from the government owing to out-of-date records, an investigation found.
The NIH is also alleged to have paid out $3.7 million in grants for a study on monkeys and gambling.
A Russian experiment putting cats on treadmills was funded as part of $1.3 billion in U.S. government funding funneled to rival powers, a report found.
Federal agencies are using less than a quarter of the office space in their headquarters, a Public Buildings Reform Board report found.
The General Services Administration spends around $2 billion a year to operate and maintain offices for the 24 government agencies and a further $5 billion to lease them.
Megastars, including Post Malone, Lil Wayne and Chris Brown, received some $200 million in taxpayer money under government pandemic relief efforts.
With Federal Debt now at 122% of gross domestic product (GDP) and more than doubling since 2000, it is is unsustainable.
The Federal Debt clock can be found here.
The notion of bringing fiscal responsibility back to Washington, where the topic of balancing the budget is reality-based and not some fantasy, is refreshing and just might be contributing to the recent strength in the dollar. Imagine the government reversing course and making progress on paying down the deficit. Business Insider reported that the United States spent $6.75 trillion in fiscal year 2024. With Social Security, health programs and Medicare topping the spending list, they are forms of mandatory spending that would require legislation to change.
At the same time, Trump’s plans for lower corporate and personal taxes to be a catalyst for faster economic growth is a moving target, as forecasters are very divided regarding what federal revenue will look like in 2025 and beyond. The jury is out on this issue, but the market is embracing the idea of more efficient government and the nearly 3% rally in the dollar since Nov. 5 appears to be supportive of it as well.
