It is hard to say whether these democratic challenges in the US will undermine the dollar in any way in the future.

There are exceptions, of course. China’s renminbi has appreciated against developed currencies such as the US dollar since it removed its dollar peg in 1985. But by and large, we might expect the more democratic countries to have the stronger currencies over the long haul. For whatever their economic and political ups and downs, strong democracies would seem to confer certain benefits, such as the very strong probability that investment in that country won’t be confiscated or undermined in some way.

We say all this because, even among what are perceived to be highly democratic and developed nations, there is still room for democracies to grow, or wither. For instance, in the US, there is the argument that civil liberties have recently been undermined by the Roe vs Wade decision to overturn federal abortion laws.

Right now, there is an inquiry into the Capitol Hill riots of January 2021, when many claimed that US democracy was on the brink. That might sound like hyperbole, but if we take a more objective look at the state of democracy in the US, we do see a relative deterioration.

For instance, the Economic Intelligence Unit (EIU) measure of democracy, which includes categories such as the functioning of government, population participation, civil liberties and more, shows a marked decline in the US – from an already quite low position. The US ranked 26th in the world in 2021, below just about all other significant developed countries; only the likes of Portugal, Italy, Greece, and Belgium were lower.

What’s more, if we look over the last 15 years, the US’s democracy score (on a scale of 0 to 10) has fallen 0.37 points from 8.22 to 7.85. That’s worse than what we see in most other countries. Germany has fallen 0.15, Canada is down 0.2, Japan is flat and the UK is actually up 0.02. The US scores particularly poorly in the ‘functioning of government’ category at 6.43, with only Greece and Cyprus worse among the developed nations (South Africa is 7.14!).

From all this, Mr. Steve Barrow, Head of Standard Bank G10 Strategy thinks it is reasonable to conclude that democracy in the US has slipped relative to other developed countries—and many developing ones. But is this likely to matter when it comes to the dollar? Apparently not, given how the dollar has performed. This being said, we should not forget the other more authoritarian concerns that have been levied against the US, such as its willingness to use the dollar’s dominance in global payment systems to punish countries such as Iran and Russia.

It is said that this sort of action could undermine the value of the dollar as other countries could fear such a fate. These actions have occurred in recent years, but the dollar has been robust, again suggesting that this democracy/currency link is a very weak one, at least if we consider just developed currencies.

However, we also have to bear in mind that the world has been a pretty scary place in recent years, what with the pandemic and now the Russia-Ukraine conflict. And it may be the case that any democratic concerns about the US—and possibly the value of the dollar—have been set aside while the market craves safety and security of assets; something that the US is known for even if democracy has slipped.

In the end, Mr. Steve Barrow thinks it is hard to say whether these democratic challenges in the US will undermine the dollar in any way in the future. What he does suggest is that the real test will come when the world moves into a calmer place, both in terms of geopolitics and financial market tensions. This, of course, could still be many months away, maybe even years. The US dollar is certainly not likely to succumb to any of these sorts of democratic considerations right now, but he does hazard a guess that they could have a negative bearing over the long haul, particularly if they continue and particularly given that the dollar is significantly overvalued.