Category Archives: Economic

Britain, Business, Economic, Financial Markets, Government, International trade, United States

The US dollar: down but not out

ECONOMIC

Intro: Reports of the declining status of the US currency have been greatly exaggerated

For economists, the impact of a falling US dollar and how that impacts Britain will be observed and monitored closely. Of interest will be why the dollar has fallen of late, what President Trump’s attitude is towards the US currency, and how that impact will be felt.

The dollar lost around 2pc during January against a basket of major currencies (as measured by the DXY index). At the time of writing, the DXY is close to a four-year low of 96.79 – a staggering 10.7pc lower than this time last year. This significant weakening of the dollar has been driven by US policy shifts, tariff uncertainties, and geopolitical tensions. It also, to a lesser extent, reflects global effort to “de-dollarise” led by China and other large emerging markets.

Just days ago, the Federal Reserve held its main policy rate at 3.5-3.75pc. But the US central bank previously cut rates by 25 basis points at three consecutive meetings – in September, October, and December 2025. Lower rates typically weaken the dollar by reducing its appeal to yield-seeking investors, prompting capital flight to higher-return assets elsewhere. Financial markets are anticipating one or two more US rate cuts in 2026, putting further downward pressure on the dollar.

Since Trump took office last January, Fed boss Jerome Powell has come under intense pressure to cut rates faster and further, with the President eager to stimulate investment.

Nominated by Trump during his first term and reappointed four years later by President Biden, Powell has resisted. He has warned of the dangers of US inflation – 3pc as recently as September and still up at 2.7pc, above the 2pc target. Trump’s announcement that he wants Kevin Warsh as the next Fed boss when Powell’s term ends in May has seen the dollar strengthen, given Warsh’s reputation as an inflation-fighting hawk. Warsh, however, is also son-in-law of Trump’s long-standing friend and billionaire donor Ron Lauder. It is doubtful whether he’d be the president’s pick without having pledged to nudge the Fed’s policy committee towards lower borrowing costs – so the pace of rate cuts could quicken, putting more pressure on the dollar.

In theory, Trump’s tariffs should have bolstered the US currency by reducing imports and improving the US trade balance. But the scale of the measures announced on “Liberation Day” in April 2025 instead contributed heavily to the dollar’s fall in value.

The president’s measures – initially hiking average effective tariffs from 2.5pc to 27pc within a month – sparked market turmoil, including an asset sell-off that pressured the US currency. Direct retaliation from major trading powers including China and the EU further eroded investor confidence and prompted US capital outflows. Trump’s tariffs, while they are less punitive than first announced, have combined with broader macroeconomic concerns – including the rise of America’s debt from 100pc to 125pc of GDP over the last decade – to drive considerable “sell America” outflows to other major currencies.

While the related dollar weakening has aggravated US inflation, a cheaper currency helps US exporters, not least “rust belt” manufacturers that are a priority among Trump’s “Make America Great Again” (MAGA) movement. That’s why many are inclined to think the president wants the dollar to keep on falling.

Trump has fuelled these concerns, pointing to the “great valuation” of the sharply depreciated US currency. There are suspicions the White House initially made its maximalist tariff demands not only as a bargaining ploy, but to strategically devalue the currency. The president’s dollar stance is nuanced – and often contradictory. He values “reserve currency status”, which sees the dollar demanded around the world both for payment transactions and a store of value. That supports the US currency, allowing America to run looser monetary policy without the inflationary impact of a dangerously weak dollar. Nonetheless, Trump has also shown willingness to tolerate and even encourage dollar depreciation for export gains (given his emphasis on appealing to blue-collar workers). Talk of the dollar’s demise, and its loss of reserve currency status, is, without doubt, overdone. The US currency still accounts for about 60pc of global foreign exchange reserves and almost 90pc of global transactions by value, underscoring its entrenched role.

Quite clearly, as the dollar has weakened, certain “safe haven” currencies have gained, with the Swiss franc up 13pc against the dollar during 2025. And despite its recent volatility, gold has soared from around $3,100 to over $4,900 an ounce since April 2025, such has been the impact of Trump’s “shock and awe” tariff announcement and the escalation of geopolitical tensions ever since.

When it comes to pound sterling, and the broader UK economy, a weaker dollar delivers a mixed offering. Benefits in lower import costs and inflation are offset by challenges for exporters, investors, and multinational firms. Since Trump’s second term, the pound has strengthened around 12pc against the dollar, from roughly $1.23 to $1.37. This makes dollar-denominated imports cheaper, reducing costs for US goods and dollar-priced commodities like oil.

And while the UK remains an inflation outlier, with a headline rate of 3.4pc in December, up from 3.2pc the previous month and higher than other G7 nations, domestic price pressure would have been even worse were it not for a falling US currency. Tourists and businesses travelling to, or dealing with, the US have also gained, with pounds stretching further abroad.

Yet the downsides are significant, particularly for UK-based companies with substantial US exposure. British-based exporters to the US have found their goods more expensive in dollar terms, undermining competitiveness and demand – especially amid US tariffs that add further barriers.

Overall, while a weaker dollar has flattered the value of sterling, and helped keep a lid on UK inflation, it has also exposed many of the UK’s structural weaknesses – a trend that looks set to continue.

Standard
Britain, China, Economic, Government, National Security, Politics, United States

Questions to be answered over China’s super-embassy

NATIONAL SECURITY

The construction of the new Chinese “super-embassy” in the heart of London has been a long-running saga, its development plans shrouded in secrecy. Back in 2018, Beijing bought the Royal Mint site – an act whose symbolism was not lost on most Britons – for £255m. Assurances were given that the building would be used for normal diplomatic functions. But when the plans were released, they included a vast basement complex with no obvious purpose. Curiously, the details of the basement were redacted.

The true extent of Beijing’s plan has now been revealed. There will be 208 underground rooms, including a hidden chamber equipped with hot-air extraction systems, one metre away from Britain’s most sensitive communication cables, which transmit financial data to and from the City of London, as well as messaging traffic for millions of internet users.

Even before these revelations came to light, the Chinese plan came with obvious security risks: last year MI5 issued an “espionage alert” about Beijing’s spies targeting MPs and parliamentary staff “at scale”, while the US told Britain to reject the proposal on the grounds that it could effectively become a den of spies working against Western interests.

Planning permission has not yet been granted, but it is widely expected that Sir Keir Starmer will approve the proposal ahead of his visit to China later this month. For many in Britain, the obvious question should loom: why?

Labour’s 2024 general election manifesto promised an audit of Britain’s relationship with China. In the end, only two paragraphs of it were published, in the National Security Strategy. And, as is publicly known, the failure last year to prosecute Christopher Cash and Christopher Berry, two alleged spies for China, was because the UK Government was not prepared to provide witnesses willing to describe China as “an enemy”.

Britain is in the economic doldrums, and Starmer is desperately seeking more direct investment for his growth plans. China has slowly been buying up Britain, purchasing UK gilts as well as companies. This leaves the UK vulnerable to pressure from Beijing, which has a record of using debt as leverage. The PM clearly believes Britain needs to be on good terms with China.

However, that shouldn’t stop him quizzing Beijing. If there is nothing to see, why was so much of the plan redacted? Why does a foreign embassy need 208 rooms underground? Why demolish and rebuild the outer basement wall of the secret chamber, directly beside the fibre-optic cables that carry information critical to Britain’s national security and prosperity? And if the embassy is built, what does Britain gain?

These questions need to be satisfactorily answered before the green light is given to build a Chinese super-embassy in London.

Standard
Economic, Europe, Government, History, Military, Politics, Society, United States

If we are unable to defend Greenland, then Europe is finished

UNITED STATES – EUROPE

Intro: Once you are reliant on foreign forces for safety you must abide by their decisions, like it or not. What is so difficult to understand about that?

IT WAS some two decades ago when Robert Cooper, Tony Blair’s foreign policy adviser, wrote: “The rest of the world… reacts to America, fears America, lives under American protection, envies, resents, plots against, depends on America. Every other country defines its strategy in relation to the United States”. And, in turn, the United States defines its foreign policy aims as effective “invulnerability”.

Fast forward to today, and Donald Trump is ruthlessly pursuing this same policy. Bombing Iran, deposing Nicolas Maduro, threatening war with Colombia, and now musing on the annexation of Greenland. “We need it for defence”.

Presidents change and domestic policy changes with the incumbent; as with the British Empire before it, however, the interests of the American state are eternal and perpetual. It is the duty of the White House to follow them, and the role of others to respond with envy constrained by their dependence or fear. In this case, the reaction in Europe to an explicit proposal for the annexation of European territory has been muted by both.

Denmark has complained that Trump has failed to show sufficient “respect for international law”, and Keir Starmer has politely asked Trump to stop musing on the prospects of conquering part of an allied nation. Beyond this squawking, however, there has been no response because Europe has no response to offer beyond hoping that Trump forgets about this issue and moves on. We are not going to see US forces conducting midnight raids to capture Danish politicians, or shots fired in anger over the fate of Greenland. Europe is not going to fight America because it can’t, and America is not going to fight Europe because it has no need to: if Trump really wants the territory and isn’t just enjoying the sight of European politicians scrambling to cover their shame, then he could apply deeply painful leverage until he gets his way.

Despite all the rhetoric about the US military and how it intends to be used in the future, the continent’s security is still guaranteed by American boots on European ground, and the outcome of the conflict on its eastern flank by the flow of American weapons and intelligence to Ukraine.

If push comes to shove, no one should be betting against Trump using this leverage to get what he wants in Greenland through some means short of outright annexation: declaring that in the absence of new US installations and treaties that deployments to Europe will need to wind down to preserve forces for the protection of the US homeland.

The diplomatic side will be smoothed over, but the faultlines will still exist. Read the responses from European leaders, and there will always be a hint of rulers who have relied on outsiders to maintain their forces, and have belatedly understood that the interests of those outsiders do not always align with their own. In this, at least, they are in company: the last Western Roman emperor was deposed by foreign allies garrisoned within his territory when their demands for land were denied. The Normans entered southern Italy as mercenaries and ended up ruling over swathes of territory. The Mamluks began as foreign slave-soldiers, and became sultans. The European nations of the present day have spent decades freeloading on US defence spending, paying lip service to the American political obsessions of the day on diversity, migration, democracy, and other cultural issues in exchange for this defence. Geir Lundestad coined the term “empire by invitation” to describe this process: embracing dependence and ever greater American intervention in the life of the Continent.

When American and European interests were aligned, this dependence and intervention was tolerable. The constraints rarely chafed. As American relative power has waned, though, the tasks necessary to secure the homeland and to secure Europe have begun to diverge. As one expert previously said some three years ago, the United States did not “have the military capacity to remain so heavily engaged in Europe while ensuring effective defence in Asia”.

Today, that military expert is at the heart of the administration’s defence policy and is putting this policy into action. Subsequently, Europe is now finding that by having a dependence on a nation with interests different to your own is a deeply uncomfortable position to be in. It is also a deeply difficult one to get out of. For all Europe’s talk of strategic autonomy, at every turn it has baulked at paying the costs that this would entail. It left security to the Americans, comforting itself that they would always be there to pick up the bill.

This dependence reaches beyond the military sphere. America and the EU might enjoy the world’s largest bilateral trading relationship, but it is not an even one. The economic might Brussels hoped to rely on is a partial illusion: US companies provide the payments systems that many European nations rely on, the cloud storage their citizens store their secrets in, the search engines, AI models, and social media platforms which determine the information landscape for the electorate. If a dispute really escalated, the kill switch is in Washington. The EU scramble for alternatives is a result of this realisation.

Yet, the mistake politicians made was a simple one. Ariel Rubinstein’s book Economic Fables makes the point that there is more than one set of rules that the world can operate on. What we think of as immutable features of society are nothing of the sort. Rubenstein was elaborating in the context of how we teach economics to students, but there is no doubt this point can usefully be taken much further.

Underneath the logic of economics and international law the base level of reality still exists. The law of the jungle does not operate in gold and contracts, and it is not tamed by them. It only sleeps, and the market is only in charge until it wakes. Wealth is only power until the men with guns decide that it should be redistributed in their favour, and their agreement to forego this only holds if you can create more wealth than they could otherwise take. Europe’s leaders are now relearning at their cost these lessons their predecessors could have taught them for free. Once you are reliant on a foreign force for safety and a foreign power for prosperity, you are no longer completely sovereign. All the cultural soft power and economic heft in the world won’t do you any good if your outsourced military decides it can insist on more favourable terms than you are willing to provide.

Standard