For more than 80 years, the U.S. dollar has been central to the international financial system, in no small part because it is the primary global reserve currency. But as in politics, narratives are incredibly important in understanding stock market moves. The past week has seen the return of stories on the so-called “sell America” trade—the idea that investors are hedging their bets by selling U.S. assets because they are worried about President Donald Trump’s threats to the global economic order.

The role of the dollar is unlikely to be diminished in the immediate future, and its status as the global reserve currency is not currently under any serious threat. But the instability of the Trump administration could lead to a slow erosion in trust in the dollar, which in the long term—think years or decades hence—could reshape global monetary infrastructure.

“What it typically takes to be a reserve currency is a deep and liquid market—which the U.S. has unquestionably—clear rule of law, and policy predictability. And the latter two are a lot less clear these days,” said Karen Petrou, co-founder and managing partner at Federal Financial Analytics.

The “sell America” trade seemed to be booming as recently as last Tuesday, as Trump escalated tensions over his desire to obtain Greenland while at the World Economic Forum in Davos, Switzerland. He compounded this by threatening to apply tariffs on European allies who opposed him; as a result, U.S. bond prices fell, the U.S. Dollar Index dropped relative to other currencies, and American stocks tumbled. By last Wednesday, however, Trump had walked back these tariff threats and announced the existence of a “framework” for a deal on the future of Greenland. The U.S. stock market bounced back, the S&P rallied, Treasury yields eased, and the dollar rebounded.

The wild swings of the past week are representative of a now-familiar pattern. The market response to Trump’s threats on tariffs is typically muted; when it seems as if he’s poised to take a significant action, that’s when it’s most likely to respond. At that point, Trump frequently backs down, as he did in Davos. Equilibrium is temporarily restored—but the threat of future tumult creates only a brief respite.

“If Trump not only says something, but then does it, you could see significant market turmoil—shock,........

© New Republic