Debased dollar and soaring gold hand China a rare opening

TOKYO — As if US Treasury Security Scott Bessent didn’t have enough stuff with which to deal, gold is literally exploding higher on his watch.

In any discussion of the global “debasement trade” gaining momentum in real time, the dollar is written between the lines in bold font. Gold is now at $5,200 for the very first time, and silver is trading more like a cryptocurrency than a precious metal — up 50% year-to-date.

“The rise in precious metals prices is breathtaking and profoundly scary,” says Robin Brooks, senior fellow at the Brookings Institution. He warns that this month’s head-spinning gold rush is “part of something much bigger.”

One of those bigger things is the interplay between the US and China. And the battleground of the moment is currencies.

Officially, Bessent is Trump’s finance minister. His real job, though, is as human Zamboni, driving behind Trump to clean, smooth out and disappear his increasingly unhinged rhetoric and actions. When Trump says he wants to fire Federal Reserve Chair Jerome Powell, it falls to Bessent to claim it won’t happen. And to feign surprise that anyone could dare ask.

When Trump talks of debasing the dollar, it’s become Bessent’s job to counsel calm. The same goes for Trump’s itchy tariff finger as he aimed at Europe, South Korea and any other place Trump World deems insufficiently obsequious.

Yet this good-cop/bad-cop routine is wearing thin, as events in Davos last week suggest. Efforts by Bessent, Commerce Secretary Howard Lutnick and other Trump officials to Zamboni Trump’s bizarre rants over Canada, China, Denmark, Greenland (which he kept calling Iceland), Russia, Somalia, Switzerland, the UK, how “you’d all be speaking German and a little Japanese if it wasn’t for us,”  NATO, windmills and the Fed’s rate policies fell flat.

So much so that it’s hard not to wonder if seeing Trump and his people bomb so terribly on the Davos stage was an inflection point for trust in US assets.

In Davos, officials were peppered with questions about Trump’s brutal immigration policies and crackdown on US cities like Minneapolis. The second killing of an American protester in the city in as many weeks has CEOs speaking out — a real rarity in the Trump era.

On the Davos stage, Bessent defended it all, including tariffs that are devastating world trade and policies that have US debt and gold surging in unison. Many are noticing that the man entrusted with protecting the value of the reserve currency is sounding more like a Trump PR staffer than an economic policymaker.

Clearly, Bessent is in “denial,” warns Desmond Lachman, a former deputy International Monetary Fund director. “As Treasury secretary, Bessent is supporting a grossly irresponsible budget and foreign policy, which is putting the United States on a path to economic ruin.”

Author Timothy Noah, who wrote “The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It,” is more blunt. Writing in The New Republic, he argues that  “for the sake of our money, Scott Bessent needs to shut up.”

Noah’s point is that “it doesn’t reflect well on a Treasury secretary when the price of gold goes through the roof,” which “means people expect higher inflation and are losing faith in the stock market, along with the overall health” of the economy.

“In such moments,” he notes, “Wall Street longs for a steady hand at the helm. Instead, they get Treasury Secretary Scott Bessent hurling insults in every direction and giving every impression that he’s about to have a nervous breakdown.”

More and more, Chinese leader Xi Jinping probably can’t believe his lucky stars as Trump sabotages the globe’s biggest economy and a currency China aims to replace. Suddenly, talk that Xi has moved too slowly to make the yuan fully convertible is swinging to how Trump is moving too fast to trash the dollar.

This debasement trade has the Japanese yen gyrating. Traders are now at a loss to decide if the yen is heading down to 200 to the dollar or 100 (from 152.45 now). If Trump had his way, it would be 100. His desire for a “Mar-a-Lago Accord” is a ploy to recreate the 1985 “Plaza Accord” that drove the dollar sharply lower.

On Tuesday, Trump was asked in Iowa if he’s concerned about the dollar’s recent decline. “No, I think it’s great,” Trump said. “I think the value of the dollar — look at the business we’re doing. The dollar’s doing great.” That sent the dollar to its lowest levels since early 2022.

In the interim, markets are being driven by “fallout from reports that the US Treasury is considering direct currency intervention,” says economist Jonas Goltermann at Capital Economics. Yet Trump is stepping up efforts to browbeat the Fed into cutting rates aggressively, which could send the dollar sharply lower.

On Wednesday (January 28), the Fed is expected to defy Trump and leave rates unchanged. “The big risk, as we see it, is not in the rate decision – we’re pretty confident that the Fed is going to hold rates unchanged,” says Nick Rees, economist at Monex. “But Trump is not going to like that.”

Nor has Trump liked the yen’s 7% drop since May. This has Team Bessent stepping up efforts to prod the Bank of Japan and the Ministry of Finance to halt the yen’s decline—and to intervene if needed. Of course, US policies may be beating Tokyo to the punch.

With Trump losing nearly every ally America ever made, accelerating the rise of US debt toward the $39 trillion mark and undermining trust in the dollar, this is China’s moment to step up and make the yuan great again.

Yet this requires tolerating a stronger exchange rate as the dollar wobbles. It means giving the People’s Bank of China more independence and making the yuan fully convertible.

It means repairing the cracks plaguing China’s financial system. It also means Xi must make good on his 2013 pledge to let market forces play a “decisive” role in economic decisions and planning in Beijing.

Over the last year of escalating US tariffs, investors have debated about whether Xi might greenlight a weaker exchange rate to boost exports. The pros are obvious. The fallout from tariffs, an epic property crisis, weak consumer spending and deflationary forces in 2025 was offset by a record $1.2 trillion trade surplus.

Yet the cons are stopping Team Xi from going the weaker yuan route. For one thing, it might make it harder for highly indebted property developers to make payments on offshore bonds. That would increase default risks in Asia’s biggest economy. Seeing #ChinaEvergrande or #ChinaVanke trending again is not what Xi’s party wants in 2026.

Bigger PBOC easing could squander years of deleveraging efforts. In recent years, Beijing has made important strides in reducing China’s financial excesses and improving the quality of gross domestic product. As a result, Xi and Premier Li Qiang have been reluctant to let the PBOC China ease more assertively, even as deflation deepened.

Xi’s government has proved more skilled at talking the talk than walking the walk when it comes to winning the trust of global investors. Too often, Team Xi has tended to over-promise and under-deliver on financial reforms.

Deeper debt markets would help sort out many of China Inc’s growing pains. During the Xi era and before it, China too often believed that pulling in more foreign capital is a reform all its own. It’s been slower to strengthen China’s financial system ahead of those waves of overseas capital.

In 2019, A-share stocks being added to the MSCI index didn’t suddenly make China’s financial system sounder, the government more transparent, companies more shareholder-friendly or the massive shadow-banking world any less of a menace.

Strengthening China Inc requires significant heavy lifting to curb the dominance of state-owned enterprises, expand economic space for the private sector, and eliminate the risk of dueling bubbles in debt, credit, assets and pollution.

The key now is for vibrant debt capital markets to help catalyze growth of all sectors, but particularly those in the high-tech space — the realm Premier Li has been elevating in recent months.

While it’s important that Beijing ends the regulatory volatility of recent years, greater international capital market participation would accelerate China’s move upmarket.

Changing this perception is key to ending deflation. One of Team Xi’s top pledges, for example, has been to prod households to deploy the $22 trillion of savings on which they’re sitting. This, however, requires building a robust, sizable social safety net to encourage consumers to spend more and save less.

It also requires reviving the property sector. With roughly 70% of Chinese household wealth tied to real estate, stopping the financial bleeding is vital to boosting spending and maintaining 5% economic growth. Barring bold and credible plans to put a floor under real estate and give 1.4 billion Chinese reasons for economic optimism, deflation could continue to fester.

Follow William Pesek on X at @WilliamPesek