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The writer is the author of the book ‘Two Hundred Years of Muddling Through: The Surprising Story of the British Economy’
One common thread running through banks’ and asset managers’ outlooks for 2025 was a near-consensus view that the dollar would strengthen further over the next 12 months. Like much else on the agenda of the incoming Trump administration, the conversation about the value of the dollar has been contradictory at times.
Donald Trump himself, along with many of his key trade policy advisers, has long argued that a strong dollar has made US exports more expensive, boosted imports and cost US manufacturing jobs. However, other key appointees, such as Treasury Secretary nominee Scott Bessent, have publicly taken a more traditional stance and supported a strong dollar.
Whatever the new administration wants, markets seem pretty confident that the result will be a stronger dollar, not a weaker one. The dollar has risen about 8 percent since late September as investors began to assess the increasing likelihood of a Trump victory in November. A stronger dollar was a key component of the Trump trade that gripped Wall Street last year. Broadly speaking, Trump’s trade is the assumption that the new president will pursue all aspects of his agenda that the markets approve of, while his broader party will hold him back from anything they are less interested in.
Tax cuts and deregulation will boost profits and stock market returns, while the resulting higher deficit will be bad, but not catastrophic, for US Treasuries. Markets expect U.S. Treasury yields to rise relative to the counterfactual assumption without Trump, but implicitly assume that the rise will not be enough to shake the stock market. The widening difference in interest rates with other advanced economies will still, according to the logic of the Trump trade, be enough to push the dollar higher. The threat of higher tariffs, which would result in less outflow of the dollar from America, has added to the dollar’s luster since November.
The consensus, then, is that the dollar will remain strong even if the new president occasionally takes to social media and sighs loudly about it. There are, however, at least three reasons to worry that this consensus is complacent.
Tariffs are the first. Economic theory suggests that in the short term the new tariffs may indeed lead to a strengthening of the currency. The currency of a trading partner subject to new restrictions often depreciates to offset, at least in part, the value of the tariffs. This was generally the case for the Chinese renminbi in 2018-19. But in the long run, tariffs are associated with lower imports and exports and an overall weaker economy. This weakness eventually leads to lower interest rates and thus to a weaker currency. Tariffs could strengthen the dollar in the short term, but weaken it in the medium or long term.
Second, it’s worth taking seriously the idea that when Trump says he wants a weaker dollar, he really means it. The threat of much higher tariffs on major U.S. trading partners could prove to be just the opening step in an attempt to force those trading partners into some form of multilateral agreement to lower the value of the dollar. There is little doubt that he is the author The art of the deal he would not be thrilled to host a summit meeting at Mar-a-Lago to preside over the negotiations. Of course, the mechanism of such an agreement would prove tricky. The Plaza Accord of 1985, in which the finance ministers of the US, UK, West Germany, France and Japan met to discuss international exchange rates, is sometimes taken as a model. But the world economy is a very different place today. 40 years ago, the five participants represented about 45 percent of global GDP, according to purchasing power parity, compared to about 25 percent today.
The other major threat to the value of the dollar can be found outside the traditional realm of economic policy. Work by economists Barry EichengreenIn 2017, Arnaud Mehl and Livia Chitu examined the geopolitical foundations of international currency value. In general, countries hold a greater proportion of their reserves in the currency of the country providing them with a security guarantee. By this argument, America’s provision of security to its allies helps maintain the value of the dollar and keeps US borrowing costs lower than they would otherwise be. If those safety guarantees begin to be withdrawn, then the dollar’s share of international reserves could begin to fall, creating further disruption.
The dollar has had a strong rally since September, but many of the positions supporting those gains may turn out to be wishful thinking.
