Economy

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldJapan’s chief trade negotiator will leave Washington without an immediate agreement after meeting Donald Trump as part of efforts to negotiate the removal of stiff US tariffs.The US president met Ryosei Akazawa on Wednesday and said on social media there had been “Big Progress!” as Japan sought to become the first major economy to secure a reprieve from Trump’s tariffs, which sparked turmoil in the global economy after they were unveiled this month.Japanese officials said the unanticipated personal meeting with Trump was a possible sign of the president’s keenness to hammer out trade deals with allies, as China also tries to deepen its engagement in global trade.Akazawa told reporters after the talks that the two sides agreed to hold a second meeting this month and seek a quick resolution. He described the tariffs as “extremely regrettable” and urged the White House to pursue a deal that would strengthen both economies.He said he was “very grateful” that the US president met his delegation, which also held talks with US Treasury secretary Scott Bessent and trade representative Jamieson Greer.The US-Japan talks are being closely scrutinised by governments around the world for clues on Trump’s strategy in escalating a global trade war.Japan, America’s biggest outside investor and closest ally in Asia, has a great deal at risk in economic and security terms if relations with Washington sour. The US has already imposed a 25 per cent tariff on Japanese cars, steel and aluminium and has refused a succession of requests for exemptions from Tokyo.The prospect of an additional 24 per cent levy under Trump’s “reciprocal” tariff regime has shaken corporate Japan and led Prime Minister Shigeru Ishiba to declare a “national crisis”. Japan recorded a ¥9tn ($63bn) trade surplus with the US for the fiscal year to the end of March, its finance ministry announced on Thursday, down 1.3 per cent from the previous year.Speaking to reporters in Tokyo on Thursday morning, Ishiba highlighted Japan’s potential advantage from its trade negotiations being a top priority for Trump.“Of course, the negotiations will not be easy going forward,” he warned.Ahead of joining the talks, Trump signalled he would raise the question of whether Japan should bear a greater financial burden for hosting US military forces at bases around the country.The US president has repeatedly described the allies’ security treaty as “unfair”, last week repeating the assertion that “we pay hundreds of billions of dollars to defend them . . . they don’t pay anything”.Japan pays about $1.4bn a year towards the cost of supporting the US military presence. The prospect that the next round of talks would involve Japan pledging higher defence spending boosted shares in Japanese defence contractors, with IHI rising 5 per cent, Kawasaki Heavy Industries gaining 6.3 per cent and Mitsubishi Heavy Industries up 1.6 per cent on Thursday.According to Akazawa, the talks did not cover foreign exchange issues and the weak yen, a preoccupation for the US administration.Talks on that issue would be conducted separately between Bessent and Japan’s finance minister Katsunobu Kato, he said.Akazawa later reiterated Japan’s position that it was not manipulating markets to weaken the yen. More

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. The S&P 500 fell 2.2 per cent yesterday, after it was revealed US export controls would restrict Nvidia’s sales. Info tech shares fell hard, as investors priced in the possibility of new artificial intelligence restrictions; the Philadelphia Semiconductor index fell 4.1 per cent, with losses for all 30 of its constituents, led by Advanced Micro Devices (down 7.4 per cent) and ASML (down 7 per cent). Email me: [email protected] yields and the term premiumOf all the ruckus in markets over the past few weeks, the most concerning part was the rapid rise in Treasury yields, and the momentary positive correlation between equity and Treasury prices. Indeed, by most accounts, this was what caused President Donald Trump to initiate the 90-day pause on tariffs.Treasury yields — which rise when prices fall — are flat now, but remain elevated, as there are still spectres haunting the bond market. Last week’s unwind of various leveraged trades was alarming, and has traders on edge. Investors are worried about rumours of foreign purchasers stepping away from Treasuries. And some market watchers are afraid of potential brinkmanship around the debt ceiling later this year, or that the Trump administration may use unorthodox debt tactics in trade negotiations. From Yesha Yadav, a law professor focused on financial regulation at Vanderbilt University:For some deep pessimists, there is a genuine stress that this administration could threaten debt default to distract from their actions, or that they could pause debt repayments to enact leverage . . . Given how staggering the tariff policy changes have been, it’s anyone’s guess as to how the next steps are likely to play out, and what the US’s debt management policies will be.Unhedged remains more optimistic. Though foreign investors could potentially turn away from US assets, recent Treasury auctions suggest there is still a healthy global appetite for US debt. Republican alignment around Trump’s budget plans last week increases the odds that the debt ceiling will be raised without incident. And, though the president’s tariff moves are hard to forecast, he did cave when the bond market panicked; pausing payments would be very rash.Last week, we were hesitant to over-read Treasuries’ moves, given how much panicked selling was taking place. But, now that things have calmed down, it is worth doing a postmortem on the subcomponents of the Treasury yield — with the caveat that, even with the benefits of hindsight, not all moves can be easily explained.The Treasury yield has three crucial components: the real yield, or the yield investors get above inflation; break-even inflation, the market’s forward expectations for consumer price rises; and the term premium, or the extra bit of yield that investors require to hold longer duration, often used as a proxy for uncertainty or political risk. Real yields fell initially after “liberation day”, but started surging in the days after, accounting for most of the rise in the 10-year Treasury yield:This is the subcomponent that is hardest to read into. The jump could have been from levered positions unwinding, or potentially from a drawdown in foreign investment, or both. However, even at their post-tariff peak, real yields were still below their highs from late last year, when investors started pricing in a surge in growth from Trump’s policies.Meanwhile, break-even inflation remains relatively low, and has been trending lower since “liberation day” and the 90-day pause:That’s a bit surprising, since tariffs ought to flow through to higher prices in the US. The market may be underpricing the inflation risk, or perhaps thinks a slowdown is more likely than stagflation. Or, when looked at together with rising real yields, it might be a vote of confidence in the Federal Reserve.Though all of the subcomponents have cooled off, the term premium remains particularly elevated — suggesting high political uncertainty among investors. Three models are typically used to measure the term premium, all developed by economists at the Fed: the Adrian-Crump-Moench model (“ACM model”), the Kim-Wright model, and the Christensen-Robenson model (“CR” model). As our colleague Toby Nangle has noted, all three have issues. But, even so, looking at the broader trend shows how our current moment of uncertainty compares to past panics:By all three measures, the term premium is high, but not disastrously so. The term premium was higher in the years following the dotcom bubble bursting, during the great financial crisis, and in 2013-2014 during the “taper tantrum”, when the Fed announced it would pause quantitative easing and the bond market panicked. It’s worth noting, however, that all three of those events were based on realised fears: two recessions and a stated central bank policy. The market’s current concerns over the growth impacts of tariffs, upcoming debt debates in Congress, and the rumoured pullbacks by foreign Treasury buyers are still speculative. Markets are not always the best at gauging political risk.There is a more direct measure of the term premium, which avoids some of the models’ pitfalls. It involves subtracting the yield on three-year one-month inflation swaps, essentially a risk-free asset linked to short-to-medium term rate expectations, from the 10-year to 10-year forward swap, or the expected yield on a 10-year Treasury note issued 10 years from now, an estimate of future rates that accounts for the current yield curve. The gap between the two is a direct measure of how much extra yield investors require to hold longer-dated coupons. By this measure, the term premium is also high and trending up, but is not as high as previous bouts of turmoil:However, Brij Khurana, portfolio manager at Wellington Management, shared with me that the previous periods of high term premia are somewhat deceiving:When the Fed cuts to zero [which is where rates were from 2008-2014], yield curves are steep. That means that when there is any rise on the back end of the curve, the [term premium] measure hits higher levels . . . This was not the case in the 2007 environment, when we had high policy rates but an inverted curve. What is interesting about now is we have high policy rates, and a very steep curve. To me, that suggests there are higher than normal fears in the bond market around future issuance and foreign selling.Khurana argues it is best to look at the gap measure through a linear regression, which shows that the current term premium is, indeed, particularly high — well above the average, and on par with periods such as the taper tantrum.To some investors, that might be further proof that what we are seeing is a changing global regime. But, once again, Unhedged is reluctant to draw any firm conclusions without more data. What we will say is that, even without Trump’s tariffs and fears of a slowdown, this was already set to be a jittery year in Treasury markets. The proposed fiscal impulse is low by recent standards, while the US’s debt and debt-servicing costs are historically high. Meanwhile, Treasury secretary Scott Bessent is making a one-way bet on Treasury yields — which may not pan out for taxpayers. One Good ReadMisfit toys.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

Chinese officials and businesses are seeking a rapprochement with the EU amid Donald Trump’s trade war, but the bloc remains deeply sceptical of becoming a dumping ground for goods diverted from the US.Beijing is looking to deepen ties with the world’s largest trading bloc with the hope of finding alternative markets for its goods in the face of steep US tariffs. China has dispatched trade delegations to European capitals in recent weeks and factories are exploring rerouting goods to the continent’s markets.EU leaders have also publicly expressed the need for greater co-operation, a strong contrast to previous declarations stating a need to “de-risk” supply chains from Beijing.But a reset in EU-China ties would need to overcome deep differences over China’s huge trade surpluses, the barriers to accessing its own market and Beijing’s tacit support for Russia’s war in Ukraine.“It is time for China and Europe to start over,” said Zhang Yansheng, a senior researcher at the state-run China Academy of Macroeconomic Research think-tank.Trump’s tariff upheaval “gives us the opportunity to rethink our trade relationship — China should export more to Europe and import more as well”, he added.Some content could not load. Check your internet connection or browser settings.Trump has imposed new tariffs of up to 145 per cent on Chinese exports, threatening to curtail the flow of trade between the world’s two biggest economies. Beijing has retaliated with 125 per cent tariffs.The EU, meanwhile, has been hit by 10 per cent tariffs, which could increase to 20 per cent if talks fail to accommodate Washington’s demands.Trump’s chaotic manoeuvring has set off a flurry of outreach between Beijing and Brussels, as both sides seek a counterpoint to the US.Chinese leader Xi Jinping told visiting Spanish Prime Minister Pedro Sánchez last week that China and the EU should “jointly resist unilateral bullying”.Even European Commission president Ursula von der Leyen, who has been a proponent of “de-risking”, told Chinese premier Li Qiang last week that the two sides should work together to provide “stability and predictability” for the global economy.“Both need alternative markets as well as a sense of stability,” said François Chimits, an economist at the Mercator Institute for China Studies. “Tactically, a move towards more bilateral co-operation between these two economic heavyweights expands their potential leverage in any talks with the US as well.”Chinese President Xi Jinping, right, met Spanish Prime Minister Pedro Sánchez in Beijing last week More

Under a sea of warehouse lights, workers at Lesotho’s Precious Garments snip, sew and press fabrics into 10,000 units of clothing each day. Among their most popular items: Trump-branded golf shirts.The polo stripe, sold by former professional golfer and Donald Trump superfan Greg Norman, is the product of a vibrant textiles industry in the mountain kingdom of 2.3mn that also manufactures for brands such as Levi’s, Wrangler and Foot Locker.Recently dismissed by Trump as a country “nobody has ever heard of”, Lesotho is the largest African garments exporter to the US and a rare success story born out of Washington’s 25-year-old African Growth and Opportunity Act (Agoa), introduced under then-president Bill Clinton to offer tariff-free access to the world’s poorest continent.All that is now at stake. “I was proud [of making Trump shirts], but now I’m not because I see I was doing business with somebody who is not interested or trustworthy,” Gerard Tsepe, the regional manager, said as he reflected on the so-called “reciprocal” 50 per cent tariffs the US president has threatened to impose on Lesotho, one of the highest rates on any country.Levi’s being made at Nien Hsing International Lesotho garment factory More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a faculty member at Yale, former chair of Morgan Stanley Asia, and author of ‘Accidental Conflict: America, China, and the Clash of False Narratives’Trade wars are political wars. The purpose of Donald Trump’s astonishing 145 per cent tariff on China is not a revival of the US economy of yesteryear but to bring Xi Jinping, his Chinese counterpart, to the table for the bluster of another Trumpian deal. That is not going to happen. Xi, despite his uncontested one-party elections, has a political equation of his own that will not allow him to bend.Xi’s political contract was sealed with a solemn pledge made to the Chinese people in November 2012, shortly after he was appointed General Secretary of the Chinese Communist party. On the steps of the National Museum of China, he espoused what has become known as the Chinese Dream: “Realising the great renewal of the Chinese nation is the greatest dream for the Chinese nation in modern history.”Framed around twin commitments to prosperity and rejuvenation, the Chinese Dream is no less a political anchor to modern China than Maga is to Trump. It was no accident that this messaging was orchestrated to reinforce a museum exhibition that featured China’s extraordinary rise following a “century of humiliation.” Xi’s statement spoke of a national renewal from which there can be no turning back. Modern China’s political calculus flows from this promise.Even if we in the west disagree with the principles and tactics of Chinese renewal, we need to take Xi’s commitment to this dream seriously. If anything, it has deepened over the years, spurring a nationalistic fervour that has important implications for China’s role in the world at large. In 2021, on the 100th anniversary of the founding of the Chinese Communist party, Xi Jinping essentially operationalised this political contract, warning that, “We will never allow any foreign force to bully, oppress, or subjugate us.”It is in this context that we need to interpret China’s latest promise to “fight to the end” in response to Trump’s tariffs. The sequencing of actions is important here. Trump struck first, even though US Treasury secretary Scott Bessent has tried to turn it around, claiming, “It was a big mistake, this Chinese escalation.” For China, Trump’s tariff attack falls well within the “bully, oppress, and subjugation” construct that Xi warned of.Ultimately, however, it’s not a question of who is right or wrong, or even who landed the first punch. Conflict arises out of a collision course between two very different political mindsets. In China a couple of weeks ago, I met with a cross-section of officials, academics, and businesspeople. Their views spanned the gamut, from party hardliners to market-oriented modern thinkers. But irrespective of where they sit on China’s political spectrum, there was no doubt of their collective conviction. As one of my most liberal thinking friends said, “China will most definitely retaliate to another tariff attack from Trump.” That’s exactly what happened.This argument can be taken one step further. The US has a president who acts out of anger and intimidation. China has a president who operates with strategic discipline. Unlike Trump, Xi doesn’t need to grandstand and personalise his pronouncements. China’s latest tariff response was buried on the website of its Ministry of Finance.This trade war pits emotional policy tantrums against more dispassionate calculation. As Trump continues to put pressure on China, China has been quick to retaliate in kind. Beijing has hinted that China’s next move won’t be another tariff action. As America’s third largest export market, the second largest foreign holder of Treasury securities, possessing a chokehold on strategically vital rare earths and a currency weapon of its own, China has many more options in its arsenal. This is a race to the bottom that no one can win. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe writer is the junior US senator for ConnecticutEconomists and pundits have spent the last two weeks frantically trying to decode what President Donald Trump’s ultimate aim is with tariffs. Last week’s spectacular flip-flop, in which he paused the majority of them for 90 days, came after the White House had spent days insisting the tariffs were not up for negotiation but were instead a long-term strategy to help revitalise the US industrial base and bring back jobs. However, there is a simple reason that Trump’s shortlived tariffs make little economic sense: they are not designed as economic policy but as a means to compel loyalty to the president. When combined with smart domestic industrial policy, tariffs can help to protect American jobs and goods. But these chaotically designed blanket global tariffs are not accomplishing anything other than threatening to send prices skyrocketing and destabilising the global economy. This makes sense because Trump’s goal seems to be to impose economic chaos, requiring the leads of industry to come running to him to plead for relief.According to reports, Trump has acknowledged that he does not mind if his policies cause a recession, so long as they do not lead to a depression. He must not remember the nearly 9mn jobs lost during the Great Recession of 2008 and the 10mn Americans who lost their homes to foreclosure. But these tariffs were never really about helping working people, bringing jobs back to the US or fixing our broken global trading system. The 90-day pause is proof of that. How many new manufacturing plants or jobs are being created to justify jeopardising Americans’ retirement plans? Which are the 75 countries Trump is negotiating with? Have they offered terms that would serve American workers and not just special interests? Or are these tariffs just about putting US companies in a chokehold until they surrender? Take Apple, for example. Commerce secretary Howard Lutnick fantasised about an “army of millions and millions of human beings screwing in little, little screws to make iPhones” that was “going to come to America”. A few days later, Apple was granted an exemption from Trump’s 145 per cent reciprocal tariff on smartphones, laptop computers, hard drives, computer processors, servers and memory chips from China. Tim Cook, who personally donated $1mn to Trump’s inaugural committee, has stayed in the president’s good graces. Lutnick later clarified that Apple was exempt from the “reciprocal” tariffs but not the soon-to-be-announced tariffs on semiconductors, guaranteeing that Apple will continue to lobby the administration.If you understand Trump’s actions as the use of executive power to bully into complicity the institutions that would otherwise stop a slide towards autocracy, then it is easy to see how tariffs fit into the plan. Some may not want to believe it, but Trump appears to be undertaking a systematic campaign to destroy any institution that might stand in his way.He has already attacked three key pillars of American democracy. He has threatened to cut off federal funding to universities, the centres of both academic research and youth protest; he is attacking top law firms by cutting them off from government contracts and stripping their lawyers of security clearances; and he is trying to silence journalists by denying them access to government facilities unless they use language preapproved by the White House.Now he is using tariffs to force companies and industries to come to the White House to beg for relief. Each company or industry will presumably be forced to make concessions in exchange for this relief. During the pause, we can expect to see one chief executive after another make the case for their company to be exempted from the tariffs. Maybe the concession is financial in nature, but more likely it is political. Most of these deals will be secret to the public.Once Trump has most law firms, universities, news organisations and private companies under his thumb, it will become almost impossible for any form of opposition to gain traction. His weaponised Department of Justice can arrest protesters and there will be fewer lawyers to defend them. University research and academic discussion of ideas that run counter to the Trump ideology will be threatened. Private companies will not object as the rule of law collapses. This is not some innovative new strategy — it is the global playbook for democratically elected leaders who want to stay in power forever. Switching tariffs on and off, and granting exemptions for your political allies, is not about trade policy. It is about bringing American industry to heel. Public outrage will be much more likely to stop Trump’s attempt to destroy democracy in its tracks if everyone can see plainly the plan he is trying to hide. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldItaly’s Giorgia Meloni will meet Donald Trump in Washington on Thursday after a first round of EU-US talks failed to shed light on the US president’s demands for de-escalating his tariff war. The Italian prime minister, a conservative nationalist, has forged a personal rapport with Trump, who has called her “a wonderful woman” and a “strong” leader. She has warned Brussels not to retaliate to Trump’s trade war and instead called for negotiations with Washington to resolve differences. The EU and US held a first round of talks this week about Trump’s tariffs — now set at 25 per cent on steel, aluminium and cars, and at 10 per cent on all other exports during a 90-day pause. If talks fail, Washington has said it will reinstate a 20 per cent “reciprocal tariff” rate on EU exports.However, EU trade negotiators engaging with the Trump administration have complained that they were not presented with the US demands, something officials hope Meloni can clarify.“We know we are in a difficult moment,” Meloni told a group of Italian business people ahead of her departure for Washington. “We have overcome far greater obstacles.”“We will do our best, as always,” she said, quipping that she did not feel any pressure. Meloni has publicly backed the EU offer to drop all tariffs on industrial goods if the US did the same. But diplomats briefed on the talks said Washington had shown no interest in reducing its levies — and that the 10 per cent tariff rate was likely to be permanent.The Italian premier has been in regular contact with European Commission president Ursula von der Leyen about the trip, including in a call on Tuesday.Meloni “has an advantage on the EU mediators — she is talking to the decider”, said Stefano Stefanini, Italy’s former ambassador to Nato. He said her meeting with Trump could be useful for the EU to find out what he wanted. “The US trade representative doesn’t really know [that]”, Stefanini added.Stefanini said Trump was likely to press for Europe to further distance itself from China. “If the EU makes a deal with the US, it will be forced to further de-risk or decouple from China as a consequence. It’s either China or the US.”The bloc has launched a series of anti-subsidy investigations against Chinese companies and levelled its own tariffs on Chinese imports, but they are far lower than Trump’s rates of up to 145 per cent. Beijing has upped its lobby efforts with European leaders, with China President Xi Jinping recently urging China and the EU to “jointly resist unilateral bullying”.But Meloni has long been wary of China, which she views as a strategic rival of the west. In 2023, she formally pulled Italy out of China’s Belt & Road Initiative, Xi’s flagship international infrastructure development project, which one of her predecessors joined. While Italy’s soft stance on EU retaliatory tariffs has irked some member states, diplomats from four member states said they had no problem with Meloni’s trip. “We are aware that she has a relationship with Trump and that can be valuable,” said one.Lucio Malan, a senator from Meloni’s rightwing Brothers of Italy party, said the Italian premier was showing “courage” by talking directly to Trump, given that trade policy is Brussels’ competence.“It would have been simpler to stay home, and say ‘after all, it’s EU business’,” Malan said. But Meloni has “chosen another way”. Stefanini said Meloni would probably emphasise the damaging impact US tariffs were having on Italy, a country that Trump claims to “love” and from which the US imported merchandise worth $70bn last year. “When you engage Trump on the basis of ‘national interest’, that’s his favourite language,” Stefanini said. “He might not give in, but it is something that he understands. If you talk to him about transatlantic solidarity, that is a waste of time.”Additional reporting by Andy Bounds in Brussels More

On August 15 1971, President Richard Nixon interrupted an episode of Bonanza to announce “a new economic policy” to American families gathered in front of their television sets that Sunday evening. Among the myriad measures the president outlined was a 10 per cent import tariff — and the suspension of the US dollar’s convertibility into gold.Nixon himself was more worried about the political backlash from Americans expecting to spend their evening with the Cartwright family at Ponderosa Ranch than the nefarious “international money speculators” his announcement targeted. Yet the consequences were enormous. Although couched as a temporary measure, the US would never again return to the so-called gold standard. What became known as the “Nixon shock” marked the end of one financial era and the beginning of a new one. The global monetary framework thrashed out at the Mount Washington Hotel in New Hampshire’s Bretton Woods in 1944 — with the gold-backed US dollar as the Sun around which every other currency circled — was dead. The Nixon shock helped usher in a new age of freely traded floating currencies, rapid credit creation and global capital flows, untethered by gold and increasingly unrestricted by governments. More than half a century later, the world is grappling with a shock of similar magnitude. Earlier this month the US administration of Donald Trump unveiled an aggressive tariff regime where both the size of the levies and the facile methodology underpinning them shocked even many supporters. Faced with a revolt in financial markets, the president announced a 90-day partial pause, but investors remain on edge. The dollar, which normally strengthens at times of financial and economic strife, has instead nosedived.Coming amid an increasingly bellicose attitude towards historical allies and an ambivalent attitude to the dollar’s hegemony by some key figures in the administration, it has forced investors and analysts around the world to confront the possibility of a new era where the US dollar’s dominance might fade — or even end.  “The trade war is just the latest example of this administration’s contempt for the rest of the world,” says Mark Sobel, US chair of OMFIF, a financial think-tank, and a former senior Treasury official. “Being a trusted partner and ally is a key pillar of the US dollar’s dominance, and has been tossed to the wind.”There are two related but subtly different questions now being asked around the world’s financial centres after this “Trump shock”. First, how far can the dollar’s recent decline go? Foreigners own $19tn of US equities, $7tn of US Treasuries and $5tn of US corporate bonds, according to Apollo’s chief economist, Torsten Sløk. If even some of these investors start to trim their positions, the dollar’s value will come under sustained pressure. Second, if the outflows gather pace, could it eventually even erode the dollar’s unique role in the global economy and financial system? Although the dollar’s value has always waxed and waned, and critics have constantly sought to tear it down, the greenback’s primacy has remained undiminished. Yet some analysts and investors now think the scale of the Trump shock could end a near-century of dollar dominance. “The US has benefited from reserve currency status for 100 years. It’s taken less than 100 days to unwind it,” says Gregory Peters, co-chief investment officer at PGIM Fixed Income. “It’s a very big deal.”When Nixon’s Treasury secretary, John Connally, attended a G10 meeting in Rome shortly after the US ended the dollar’s convertibility, the bombastic Texan told his shocked international counterparts: “The dollar is our currency, but it’s your problem.” The Trump administration’s view is the opposite: the dollar is everyone’s currency, but America’s problem. And this is not as perverse as it might seem.Despite Nixon severing the dollar’s link to gold in 1971, the greenback has remained at the centre of the monetary universe. In fact, thanks to the dollar’s importance in the expanding and increasingly interconnected global financial system, its importance has only grown. Far from eroding the dollar’s importance, the Nixon shock entrenched it in new ways.Nowadays, the US only accounts for about a quarter of the global economy, but more than 57 per cent of the world’s official foreign currency reserves are in dollars, according to the IMF. While much has been made of its relative decline in central bank reserves over the past few decades, the reserves statistics arguably underplay the dollar’s centrality. There are many other pots of sovereign and quasi-sovereign money that are not captured by the IMF’s data on foreign exchange reserves, and whether you are a bank in Mongolia, a pension plan in Chile, a European insurance group or a Singaporean hedge fund, dollars are the ultimate reserve asset.The dollar is equally central in trade, with 54 per cent of all export invoices denominated in dollars, according to the Atlantic Council. In finance, its dominance is even more total. About 60 per cent of all international loans and deposits are denominated in dollars, and 70 per cent of international bond issuance. In foreign exchange, 88 per cent of all transactions involve the dollar. Even physical US bank notes are widely held abroad, thanks to the dollar’s broad acceptance. In fact, about half of the more than $2tn worth of US bank notes in issue are held by foreigners, according to the Federal Reserve.This enormous international demand for dollars translates into an embedded premium to US assets and means that the US borrows more cheaply than it would otherwise do — what France’s former president, Valéry Giscard d’Estaing, once famously referred to as America’s “exorbitant privilege”. It also gives the US the power to sabotage another country’s financial system through sanctions. President Richard Nixon, right, talks to his Treasury secretary, John Connally, in the White House. Donald Trump’s measures this month could be as seismic as Nixon’s 1971 economic policy changes More