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Investors are increasingly dumping US dollar debt amid surging national debt exceeding 40 trillion dollars and soaring inflation, forcing interest rates to multi-decade highs and prompting the Reserve Bank of Australia to consider further rate hikes.
In God We Trust. While it first appeared on a 2-cent coin in 1864, it wasn't officially adopted until 1956, when Dwight D Eisenhower declared it the national motto.
Now, the phrase appears on every US coin and printed currency note. A hint of moral superiority, combined with equal parts economic and military power, the greenback and its position as the world's reserve currency have symbolised America's global hegemony since the end of World War II. But the crown is beginning to slip. Investors have begun to lose faith in the once almighty US dollar, and in the past few weeks, a coup has been launched against Washington.
National debt has doubled since Donald Trump first took office a decade ago to more than $US40 trillion. For the second time since Donald Trump's return to the White House, global bond markets are in outright revolt. They first forced the newly re-elected president's hand in April last year after he launched his "Liberation Day" tariffs, and he duly walked back some of the trade penalties. But now they are taking no prisoners.
Investors are dumping US dollar debt in a vicious market rout, forcing American and global interest rates to their highest levels in decades. Alarmed by a national debt that has doubled since Trump first took office in 2016 and which has now expanded beyond $US40 trillion — along with soaring inflation driven by a Middle East war that is becoming increasingly intractable — investors seeking safety are beginning to look elsewhere.
Global investors are losing faith in a volatile US government under Donald Trump. And that is likely to have a profound impact on the Reserve Bank of Australia as it meets today in what most economists believe is a foregone conclusion: that we will see a fourth rate hike for 2026. They either follow interest rate decisions to align their trades with the monetary mandarins or desperately try to figure out what the next central bank move may be.
Money markets are calling the tune, and investors are dictating interest rate policy to those pulling the levers. Reuters: Evelyn HocksteinThe US Federal Reserve, led by the newly appointed Kevin Warsh, who Trump installed to specifically cut interest rates, has just delivered its first rate hike in more than three years. Investors are dumping US government debt. In order for America to continue funding its ever-increasing deficits, it must now offer much higher interest rates to attract global cash.
That's increasing America's annual interest bill, which already outstrips the mammoth annual defence spend, thereby creating a snowballing federal budget problem. Because America is still the world's biggest economy. It is the international investment capital, and the US dollar remains the global reserve currency. America, despite its diminished role, still calls the shots on the cost of cash.
And despite their ambitions, neither China nor the European Union are capable of replacing America, at least in the medium term. Reuters: Brendan McDermidWhen it comes to the economy, the US will continue to underpin and influence what happens across the planet. A month ago, US 10-year government bonds — the global benchmark for risk-free investments — carried a yield, or interest rate, of about 4.65 per cent. It's now at more than 5.2 per cent.
That's had a corresponding impact on Australia's money markets. Our 10-year government bond yield has been in lock-step. From less than 5.1 per cent a month ago, our similar rate has now jumped to more than 5.4 per cent. Even allies look elsewhere for financial safety In Ernest Hemingway's The Sun Also Rises, there's a conversation that neatly sums up America's current situation.
"Two ways" is the answer. "Gradually, and then suddenly". (American dominance has been on the slide for years. But the trend appears to be accelerating.
A decade ago, US dollar-denominated debt accounted for 65 per cent of global central bank holdings. That's now dropped to 56 per cent. Once the biggest investor in US government debt, China has been actively selling down its holdings as relations have deteriorated, an unsurprising trend.said it would reduce its holdingsOther nations have been switching to gold. Last year, gold reserves for the first time surpassed official holdings of US government securities.
Some have been rattled by America's willingness to use its control of the financial system to sanction adversaries like Russia and Iran. They fear the practice may be expanded on a whim, given the US president's mercurial nature. Others are wary of an increasingly aggressive America and its constant threats on trade and defence spending.
They're simply trying to reduce the risk of an unprovoked outburst.their physical gold reserves out of US vaultsWhen Michele Bullock fronts the media pack this afternoon, she will likely highlight local conditions that have led to the rate-hike decision. AAP: Dan HimbrechtsDeclining productivity, an economy running close to capacity, huge investment funds via the artificial intelligence boom flowing into the country, and a tight labour market will all be front of mind.
But the rise in interest costs is no passing phenomenon. The graph below shows US interest rates since the 50s, specifically the 10-year government bond yield. It acts almost as a blueprint for our own interest rate trajectory. For 40 years, from 1980 on, global inflation was in decline.
But that trend has now reversed and likely has further to run. China's rise as an economic powerhouse delivered the world ever cheaper industrial and consumer goods as developed nation industries pulled up stumps and emigrated to the Middle Kingdom. Its biggest export to the West was ever-lower inflation, which, coinciding with financial and banking deregulation, generated ongoing interest rate cuts. But globalisation has run its course.
What once was an economic boon has become a political weight on developed world governments, with many now trying to unpick those supply chains and bring industry back home. Escalating global tensions have lifted the demand for defence spending while the AI boom has placed enormous demands on capital markets for cash. Maintaining its dominant position will rely upon its ability to regain the trust it has torched with its allies and trade partners.
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