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Charting the progress of global capital’s protracted bet on US exceptionalism is becoming an ever more disorientating pursuit. Of course, you cannot gainsay the strength of the underlying story. Whether on the basis of military strength, demography, energy self-sufficiency, technological supremacy or the depth of its markets, the US has, realistically, no international peer — even if China aspires to challenge its hegemonic position.
Despite the April tariff tantrum in the markets on Donald Trump’s absurdly named “liberation day”, global investors have, on the face of it, been forgiving and chosen to bask in the euphoria of the artificial intelligence boom. The US Treasury market, though perturbed by recent events, remains the chief provider of supposedly safe assets to the world. And the dollar remains the pre-eminent reserve currency despite amounting to only 58 per cent of global foreign exchange reserves in 2024 against 72 per cent at the turn of the millennium.
Yet under the surface all is not well. This is apparent in the changing asset and currency preferences of global public investors such as central banks. A recent survey by the Official Monetary and Financial Institutions Forum (OMFIF) showed that an overwhelming concern for central bank reserve managers was now turbulent geopolitics and — more specifically — tariffs and trade policies. Meantime, the dollar was the only currency where net demand from central banks declined last year.
It has become clear that the whole variegated menu of Trumpian self-harm, ranging from the assault on the Federal Reserve’s independence to the chaotic nature of US policymaking, is weighing on investors and sinking the US currency.
Exacerbating it all is the overriding worry about fiscal sustainability. The Congressional Budget Office projects that on unchanged revenue and spending, federal debt held by the public, boosted by large deficits, would increase from 100 per cent of GDP in 2025 to 156 per cent in 2055. That would take it to levels beyond anything seen since government records began in 1789.
No one expects Trump to rein in those deficits: fiscal consolidation is for the birds, as indeed it was under Joe Biden. So investors naturally question whether the US has the fiscal capacity to service the enormous balance sheet liabilities it is creating and will not try to inflate away the debt. Joerg Ambrosius at State Street says all these vulnerabilities suggest that dollar exceptionalism is evolving from an automatic privilege to a policy-contingent asset.
The game for global investors is thus to retain exposure to attractive US assets while decoupling from Trump’s more egregious policies. Data from the Bank for International Settlements indicates that this is precisely what happened after the April tariff tantrum.
While much of the dollar’s decline occurred during Asian trading hours, there were no meaningful outflows from US assets. Foreign investors were hedging previously unhedged exposures and thus repricing US exceptionalism. Ambrosius sees the dollar’s decline as a hedge-cost shock interacting with fiscal credibility concerns rather than a wholesale reassessment of US asset quality.
That reassessment may yet come in relation to AI. Bulls, seriously afflicted by Fomo, or the fear of missing out, believe we are only just beginning on a path to artificial general intelligence which will deliver huge uplifts in productivity and transform the economy. Yet the Big Tech pledge to invest more than $300bn this year in data centres and infrastructure supporting large language models is also a classic case of Fomo.
There are huge uncertainties about how far AI will transform scientific discovery and hypercharge technological advance. As George Saravelos of Deutsche Bank points out, growth is not coming from AI itself but from building the factories to generate AI capacity. Once the factories have been built, will the productivity gains from AI take over? And how globally disseminated will those benefits be? Other challenges include the growing strain on global supply chains, especially for chips, power and infrastructure.
As for economy-wide gains in productivity, few of the biggest listed US companies are able to describe how AI was changing their businesses for the better. Equally striking is the minimal euphoria some Big Tech companies display in their regulatory filings. Meta’s 10k form last year reads: “[T]here can be no assurance that the usage of AI will enhance our products or services or be beneficial to our business, including our efficiency or profitability.” That is an interesting basis on which to conduct a capex splurge.
Yet do not expect an early end to this double-Fomo fuelled market. Fiscal and monetary policy across the world are loosening. There is no credit bubble as in the run-up to the great financial crisis. Valuations are not as extreme as in the dotcom bubble. And the allure of US exceptionalism decoupled from Trump is potent stuff. Barring geopolitical meltdown, then, the beat goes on.
john.plender@ft.com
