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Your guide to what the 2024 US elections mean for Washington and the world
The writer is a professor at Dyson College at Cornell University and a senior fellow at the Brookings Institution.
US President-elect Donald Trump wants to weaken the dollar in order to boost exports, protect American jobs from foreign competition and reduce the trade deficit. He also wants a strong dollar and will not tolerate any challenges to his dominance of global finance.
If this is not enough inconsistency, the new administration's policies may run counter to the purposes of these two intentions. Its actions are likely to strengthen the value of the dollar in the near term, while its status as a reserve currency may become more shaky.
But what it means for the world is a great deal of uncertainty about US trade policies – accompanied by turbulence in global capital flows and exchange rates. The volatility that characterizes US policies and financial markets invariably spills over into the economies and markets of other countries. The greatest irony of all is that this would encourage a flight into dollar assets, which are still considered the safest investments.
This would strengthen the dollar's dominance even as Trump undermines the institutional framework that forms its bedrock.
The president-elect has talked about devaluing the dollar, but imposing tariffs on imports from major US trading partners would have the opposite effect – driving up the value of the dollar and making it harder for US exporters to compete in global markets.
The new administration is likely to expand the US budget deficit: tax cuts are unlikely to be matched by spending cuts. This would lead to a decline in national savings in the United States. Meanwhile, as China, Europe, Japan, and the rest of the world enter an economic recession, the United States remains one of the best places to invest. The country's recent productivity “boom” contrasts sharply with weak productivity growth in other major economies.
This means that the imbalance between saving and investment, which is the root cause of the overall trade deficit in the United States, will widen. Definitions don't matter. But unless the United States isolates itself from the rest of the world, it is this imbalance that ultimately determines the trade deficit.
J.D. Vance, Trump's running mate, has made it clear that the dollar's dominance has some negative effects on the US economy. This dominance leads to increased demand for the currency, which leads to an increase in its value compared to other currencies. This makes American imports cheaper while making it harder for American companies to compete in foreign markets — both of which have undoubtedly hurt U.S. manufacturing. But Trump himself cannot ignore the idea of a decline in the dollar due to the actions of other countries. He recently threatened to punish the BRICS economies – needless to say, with higher tariffs – if they tried to reduce their dependence on the dollar.
However, it is precisely Trump's actions that will undermine core elements of the American institutional framework. With approval from both houses of Congress available to the president-elect, Washington's system of checks and balances will be considerably weaker in the next few years. The rule of law will have a very different meaning under Trump as well, with the judicial system clearly inclined to serve his political goals. Jay Powell will remain Fed chairman for the time being, but it's a fair bet that the central bank's independence will be under attack if its policies run counter to Trump's wishes.
These elements of the American institutional framework are essential for maintaining the confidence of local and foreign investors. Its imminent weakness would undermine the dollar.
But context and timing are everything. There is a deep dilemma at the heart of the international monetary system that the Trump era will bring into greater clarity. His volatile policies – and the volatility they create in global financial markets – will send investors around the world (and even foreign central banks) seeking safety. They have nowhere else to turn but to the dollar.
Despite all the talk of diversification, it has become clear that the rest of the world is in no position to compete with the dollar's dominance. The eurozone is experiencing economic distress and political instability, China's economy is suffering from cyclical and structural weakness, and no other major currencies are supported by strong economies and financial systems. Even if the Trump era is good for Bitcoin, its volatility means it is not a safe asset.
Thus, in a final irony, the parlous state of other countries means that Trump's policies (and currency tantrums) may serve to boost the value of the dollar in the short and long term rather than harm its value or dominance. This is the case whether one believes in American exceptionalism or not. The rest of the world only has itself to blame.
