The dollar faces challenges in Trump’s new global order
The emergence of Trump’s new world order poses significant challenges to the stability of the dollar. The actions of President Trump represent a significant disruption to a geopolitical framework that has been established over many years. One possible casualty: the U.S. dollar. In a matter of weeks, a significant rise in tariffs coupled with trade uncertainty has ignited concerns regarding a potential deceleration in U.S. economic growth. Concurrently, significant alterations in U.S. foreign policy have fostered a wave of optimism regarding the European economy—resulting in a notable depreciation of the dollar relative to the euro, propelling European stock markets to unprecedented heights and catalyzing the most substantial increase in German bond yields since the aftermath of the Berlin Wall’s collapse.
The Dollar index has experienced a downturn in seven of the last nine weeks, effectively nullifying the gains achieved following the November 5 election. The persistence of such financial upheaval may yield significant consequences for a range of factors, including global investment flows and the trajectory of trans-Atlantic tourism. For many years, political leaders in the United States have largely supported the dominance of the dollar within the global financial framework, partly due to its contribution to lower government borrowing costs. The nation’s expenditure on defense has reinforced that stance by increasing the budget deficit, which is largely funded by foreign investors, who possess approximately one-third of U.S. debt.
Currently, Trump and certain advisers are signaling a desire to allocate fewer resources towards the defense of allies. There is a prevailing sentiment advocating for a depreciation of the currency to enhance domestic manufacturing competitiveness by reducing the cost of goods for international consumers. “When analyzing these policies from a broader perspective, one can discern a systematic approach,” stated Lloyd Blankfein, the former CEO of Goldman Sachs. The potential for short-term dislocation presents a risk to the markets. However, it is my belief that our republic would benefit from allocating a few additional thousand dollars towards automobiles, as this investment would yield a workforce capable of producing goods and possessing the means to purchase what they create.
Nonetheless, a considerable number of participants in the financial markets express concerns regarding the potential negative implications of these alterations. A depreciated dollar would increase the cost of imports, thereby exacerbating inflationary pressures and complicating the Federal Reserve’s ability to lower interest rates. Capital outflows from U.S. assets that exert downward pressure on the dollar may simultaneously contribute to a decline in stock prices and result in elevated borrowing costs for the U.S. There is a prevailing skepticism regarding the likelihood of a significant depreciation of the dollar in the near term, largely attributed to the fact that U.S. interest rates remain elevated relative to those in most other developed economies, thereby ensuring sustained foreign investment.
Nonetheless, “the developments of the past few weeks could significantly alter the landscape,” stated Katie Nixon, chief investment officer at Northern Trust Wealth Management. The recent depreciation of the dollar has taken investors by surprise. It was widely anticipated that Trump would primarily operate within the conventional Republican framework, emphasizing tax reductions and the dismantling of regulatory measures. The anticipation of accelerated economic expansion, alongside a slight increase in tariffs, initially propelled both stock prices and the value of the dollar upward following Trump’s electoral victory.
Investors are currently reassessing those foundational assumptions. The imposition of significant tariffs by Trump on imports from the United States’ principal trading partners has elicited swift countermeasures from Canada and China. The administration has initiated a process to reduce the federal workforce by thousands of positions. The discourse surrounding tax reductions has significantly diminished in prominence. The cumulative effect of these factors has led to a decline in projections for U.S. economic growth. Investors are increasingly concerned not only about the actual tariffs but also the uncertainty they generate, which is anticipated to elevate consumer prices.
In the interim, optimism regarding Europe has surged. This can be partially explained by a series of improved data points, but it also arises from Europe’s decision to increase military expenditures following Trump’s public confrontation with Ukraine’s President Volodymyr Zelensky at the White House in late February. Concerned about the reliability of U.S. support for their strategic interests, German leaders declared shortly thereafter their intention to depart from longstanding precedent by increasing borrowing to finance a military expansion. Officials from the European Union have presented a strategy aimed at generating substantial financial resources for defense, alongside a proposed easing of fiscal regulations at the national level.
For investors, the pivotal aspect of these announcements was their commitment to ongoing investments. The euro has experienced intermittent appreciation against the dollar at various points over the past few decades. However, this time the initiative may prove to be sustainable, as Europe is indicating that it is “not merely a temporary measure, akin to the Covid stimulus,” remarked Sonu Varghese, global market strategist at Carson Group, a financial advisory firm.
The depreciation of the dollar has been relatively slight, insufficient to significantly impact U.S. exporters. Nonetheless, this development has garnered the interest of Wall Street, as it aligns with Trump’s longstanding objectives. Trump has frequently contended that a weaker dollar is preferable, asserting last year that the strength of the currency constituted “a disaster for our manufacturers.”
Stephen Miran, the newly appointed chair of the White House Council of Economic Advisers, proposed a number of unconventional strategies in a paper from the previous year regarding potential methods for Trump to devalue the dollar. The proposal encompassed the implementation of a user fee for foreign purchasers of Treasurys. A segment of Wall Street is giving considerable attention to these concepts. According to Eric Stein, head of investments at Voya Investment Management, a contributing factor to the recent depreciation of the dollar is the awareness among investors regarding the administration’s objectives.Nonetheless, there exists skepticism regarding the efficacy of Trump’s policies in achieving their intended outcomes.
According to Brad Setser, a senior fellow at the Council on Foreign Relations, Trump’s dedication to tax reductions is likely to result in a persistently large federal budget deficit. The necessity for increased borrowing to address the deficit is likely to sustain elevated U.S. Treasury yields and exert upward pressure on the dollar, as international investors pursue high-yielding assets. In an alternative scenario, the dollar may persist in its depreciation, potentially allowing Trump to realize his objective of narrowing the disparity between U.S. exports and imports, albeit as a consequence of a struggling U.S. economy, Setser noted.
There is a possibility that foreign investors will consider reallocating their capital away from U.S. assets. However, the alternatives, such as those in Europe, face their own set of challenges. “This situation is generating a significant degree of uncertainty,” remarked Robert Rubin, who held the position of Treasury secretary during the Clinton administration and previously co-led Goldman Sachs. “Conversely, what alternatives do foreign companies and investors have?”
