A deal on a strong dollar can be very sloppy

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The author is the author of ‘Two Centuries of Moodling in: The Surprising History of the British Economy’.

Ahead of 2025, a common line of expectations from banks and asset managers was a consensus that the dollar would strengthen further over the next 12 months. As with so much else on the incoming Trump administration’s agenda, the discourse around greenback value is sometimes contradictory.

Donald Trump himself, along with many of his key trade policy advisers, has argued that a strong dollar will make US exports more expensive, encourage imports and cost US manufacturing jobs. Others appointed to key jobs, such as Scott Bessant, a nominee for Treasury secretary, have publicly taken a more traditional stance and supported a strong dollar.

Regardless of what the new administration wants, the markets seem convinced that the outcome will be a stronger dollar, not a weaker one. The dollar was up 8 percent in late September as investors grew more optimistic about a Trump victory in November. A stronger dollar has been a key part of the Trump trade that has gripped Wall Street over the past year. Broadly speaking, the Trump trade is the assumption that the new president will follow whatever agenda the markets approve of, and will be dissuaded from anything less popular with his broad party.

While tax cuts and deregulation will boost profits and equity market returns, a higher deficit is bad for US Treasuries, but not catastrophic. Markets expect yields on U.S. government bonds to rise in light of Trump’s counterfactual, but implicitly assume the increase won’t be enough to upset the stock market. A widening interest rate differential with other advanced economies will be enough to push the dollar higher under Trump’s trade logic. The high threat of tariffs, which has caused dollar outflows from the US to decline, has added to the dollar’s bullishness since November.

The consensus view is that the dollar will be strong, even if the new president occasionally moans loudly. However, there are at least three reasons why we should worry that this agreement is negligent.

Tariffs are the first. According to economic theory, in the short term, new tariffs can lead to a strengthening currency. The currencies of trading partners exposed to new restrictions often depreciate to at least partially offset the cost of tariffs. In 2018-19, this was largely the case with the Chinese renminbi. But in the long run, tariffs are associated with lower productivity and an overall weaker economy. That weakness eventually leads to low interest rates and thus a weak currency. Tariffs give the dollar a short-term boost but weaken it in the medium to longer run.

Second, it’s worth taking seriously the notion that when Trump says he wants a weaker dollar, he means it. The threat of high tariffs on America’s major trading partners could be just the opening gambit in an attempt to bring those trading partners into some kind of multilateral agreement to lower the value of the dollar. The author may have little doubt The wisdom of the deal He is not happy to arrange a meeting at Mar-a-Lago to conduct the negotiations. Of course, the mechanics of such an agreement will be difficult. The Plaza Accord of 1985, in which the finance ministers of the US, UK, West Germany, France and Japan met on international exchange rates, is sometimes used as a model. But the world economy is a very different place now. 40 years ago, the five participants represented 45 percent of the world’s gross domestic product and purchasing power.

Another major threat to the value of the dollar can be found outside of traditional economic policy. Work In 2017, economists Barry Eichengreen, Arnaud Mehl, and Livia Chittu examined the geopolitical underpinnings of global currency fluctuations. In general, countries hold more than their reserves in the currency of the country they are bailing out. According to this argument, the security that the United States provides to its allies will increase the value of the dollar and lower the cost of borrowing for the United States. If those securities begin to suffer, the dollar’s share of global reserves could begin to fall, creating additional headwinds.

The dollar has had a strong run since September, but much of the sentiment behind those gains may be wishful thinking.