Bridgewater: The role of the U.S. dollar 'is inevitably going to fall'

The U.S. dollar’s (DX-Y.NYB) dominance in world financial markets is poised to erode over time as government officials seek to manipulate the strength of the currency for political purposes, according to the head of investment research at the world’s largest hedge fund.

“The U.S. dollar has had such a dominant role in the global financial system for so long that it can’t get stronger, and at this point the United States has showed its willingness to use the dollar as more of a political tool,” Karen Karniol-Tambour of Bridgewater Associates told Yahoo Finance at the World Economic Forum in Davos, Switzerland, on Thursday. 

Karniol-Tambour’s remarks are an apparent reference to the Trump administration’s crusade calling for the Federal Reserve to lower rates and weaken the dollar.

A weaker dollar would make U.S. exports more attractive by making outgoing goods cheaper for the rest of the world, supporting the administration’s goal of shrinking the U.S. trade deficit with its trading partners. And lower interest rates typically decrease the yield on that country’s assets like government bonds, sending investors scurrying elsewhere for returns and thereby decreasing the value of the currency used to buy those assets.

The U.S. dollar could cede its dominant role in global financial markets in the long-term, according to Bridgewater Associates' head of research. REUTERS/Yuriko Nakao

In one Twitter post in mid-last year, President Donald Trump said the euro and other currencies were “devalued against the dollar, putting the U.S. at a big disadvantage,” and he decried the Fed for keeping its benchmark interest rate at a level he considered “way too high.” Trump repeated similar calls for a weaker domestic currency and lower rates throughout the year, although the Fed has insisted it operates independently of political pressures.

But the rhetoric has nevertheless seeped into the global psyche and put the U.S. dollar’s position as the world reserve currency at risk in the long-term, Karniol-Tambour said.

“We’re seeing more and more countries that are asking themselves, ‘How concentrated do I really want to be in dollars?’” she said.

“That said, [there are] not so many global alternatives today that are as viable,” she added. “Over time, the role of the dollar is inevitably going to fall.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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