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The writer is the author of Two Hundred Years of Flounder: The Surprising Story of the British Economy.
One common denominator among banks' and asset managers' forecasts for 2025 was a near-unanimous view that the dollar will rise further in the next 12 months. Like much else on the incoming Trump administration's agenda, talk about the value of the dollar has been contradictory at times.
Donald Trump himself, along with many of his key trade policy advisers, have long claimed that a strong dollar has made American exports expensive, encouraged imports and cost American manufacturing jobs. But others appointed to key jobs, such as Scott Besent, who was nominated for Treasury Secretary, have publicly taken a more traditional stance and supported a strong dollar.
Whatever the new administration desires, markets seem reasonably certain that the result will be a stronger dollar, not a weaker one. The dollar has risen about eight percent since late September, when investors began to estimate the increasing possibility of a Trump victory in November. A strong dollar was a key component of Trump's trade that swept Wall Street last year. Overall, the Trump deal is an assumption that the new president will pursue all aspects of his agenda that markets agree on, while being constrained by his broader party from anything he is less keen on.
Tax cuts and deregulation would boost profits and stock market returns, while the resulting higher deficits would be bad, but not tragic, for US Treasuries. Markets expect the yield on US government bonds to rise relative to Trump's absence, but they implicitly assume that the rise will not be enough to destabilize the stock market. However, the growing interest rate differential with other advanced economies would be enough, according to the logic of Trump's trade, to push the dollar higher. The threat of higher tariffs, which would result in fewer dollars leaving the US, has increased the dollar's luster since November.
So the consensus view is that the dollar will remain strong even if the new president occasionally takes to social media to complain loudly about it. However, there are at least three reasons to worry that this consensus is complacent.
Definitions are the first. Economic theory suggests that in the short term new tariffs could actually strengthen the currency. The value of the currency of a trading partner subject to new restrictions often declines to compensate, at least in part, for the value of the tariffs. This was broadly the case with the Chinese renminbi in 2018-2019. But in the long run, tariffs are associated with fewer imports and exports and a weaker economy overall. This weakness ultimately leads to lower interest rates and thus a weaker currency. Tariffs may give the dollar a boost in the short term, but weaken it in the medium and long term.
Second, we should take seriously the idea that when Trump says he wants a weaker dollar, he actually means it. The threat of much higher tariffs on America's major trading partners may be merely an opening gambit in an attempt to persuade those trading partners to enter into some form of multilateral agreement to lower the value of the dollar. There is no doubt that the author of the book The art of the deal He will not be happy to host a summit at Mar-a-Lago to chair the negotiations. Of course, the mechanics of such a deal would be difficult. The 1985 Plaza Accord, in which the finance ministers of the United States, the United Kingdom, West Germany, France, and Japan met to discuss international exchange rates, is sometimes seen as a model. But the global economy is a very different place these days. Forty years ago, the five participants represented about 45% of global GDP, in purchasing power parity terms, compared to about 25% today.
The other major threat to the value of the dollar can be found outside the traditional scope of economic policy. a job By economists Barry EichengreenIn 2017, Arno Mehl and Livia Chito studied the geopolitical foundations of international currency values. In general, countries hold a greater share of their reserves in the country's currency, which provides them with a security guarantee. By this argument, the United States' provision of security for its allies helps maintain the value of the dollar and keeps American borrowing costs lower than they would otherwise be. If these security guarantees begin to wane, the dollar's share of international reserves may begin to decline, which would provide further headwinds.
The dollar has been rising strongly since September, but many of the views supporting these gains may be wishful thinking.
