Trump's Strategy to Depreciate the Almighty Dollar

Economic orthodoxies are facing challenges from all sides during Donald Trump’s second term as president.

Prevented from seeking a third term and thus liberated from the usual pressures of needing to campaign again, he acts as though driven by demons .

What follows next? It's difficult to predict, however, one policy aim that has thus far been given merely superficial consideration is an apparent effort to devalue the dollar.

At first glance, this may appear like an unusual aim within Trump’s broader "Make America Great Again" (MAGA) platform. To be honest, it isn’t actually Trump himself who promotes this idea openly; rather, several key individuals within his administration do so.

A robust dollar has traditionally been a cornerstone of U.S. economic strategy. It aids in maintaining low inflation rates and promotes growth. investment from abroad into the US , and it supports the dollar’s role as the dominant global reserve currency.

Moreover, it is broadly recognized both within the country and globally as a symbol of American economic power and an emblem of sustained dominance.

Why would Trump risk tampering with such a valuable resource, especially considering how readily the dollar’s centrality within the global financial framework can be exploited as a tool for geopolitical strategy?

No other nation wields the same financial influence overseas as the U.S. does with its strong dollar. Former French President Valéry Giscard d'Estaing referred to this advantage as America’s "exorbitant privilege".

I assume this isn’t a characteristic that Trump would wish to do away with. However, the MAGA toolkit is filled with inconsistencies, and it follows logically from the president’s stance that actions aimed at devaluing the dollar are part of his strategy. broader advocacy for protective trade policies .

This occurs as higher tariffs generally cause the implementing nation’s currency to strengthen, while exerting a weakening effect on the economies targeted by these measures.

If all other factors remain constant, tariffs will increase inflation within the domestic U.S., leading to higher interest rates. This applies similarly to most aspects of Trump’s economic plan, which through unpaid-for tax reductions aims to provide significant stimulation.

Should the economic downturn that many experts predict actually occur, interest rates would likely drop. However, this decline wouldn’t automatically alleviate the upward pressure on the U.S. dollar’s value. The dollar maintains its strength during difficult times due to its role as a global reserve currency and its appeal as a safe-haven asset.

Regardless, an appreciating US dollar would diminish some of the competitive edge provided by tariffs for American manufacturers, thereby hindering Trump’s primary objective of transforming the U.S. economy back into a dominant force in manufacturing.

It shouldn't shock you since this has happened before. Fast forward to the 1980s, during President Ronald Reagan's tenure, when the U.S. faced a substantial trade gap. This situation was exacerbated by expansive fiscal measures from the government, leading to a fairly robust dollar supported by elevated interest rates.

Facing the possibility of tariffs, the United States’ top four trading nations at the time—Japan, Germany, France, and the UK—were convinced to take action in currency markets to devalue the U.S. dollar. This arrangement was later referred to as the Plaza Accord.

It was successful; over the span from peak to trough, the dollar shed approximately 40% of its trade-weighted value. This achievement has spurred demands within the Trump administration for a follow-up initiative, which is being referred to as the "Mar-a-Largo Accord" due to evident reasoning.

However, the world has transformed significantly since then, largely due to the emergence of another massive presence—the People’s Republic of China—on the international scene.

In a world where former allies are now betraying one another, reaching the required agreement for Plaza 2.0 would likely be extremely difficult if not unattainable.

For sustainability, this scenario would necessitate the US maintaining artificially low interest rates, whereas elsewhere they should be significantly higher. Such a situation could lead to increased inflation within the US and may not be appealing to places like Europe or China, where current economic circumstances are fragile.

In another approach, nations might be coerced into compliance. Stephen Miran, recently appointed chairman of the U.S. Council of Economic Advisers, proposes that countries running surpluses should have their currencies tied to the dollar at advantageous rates for the U.S., under threat of facing increased trade tariffs if they decline.

Even if this type of competitive devaluation through coercion proved initially effective, it wouldn't necessarily halt the influx of international investment into U.S. markets, making it difficult to sustain over time.

Miran proposes addressing this issue by taxing coupons on U.S. Treasury securities purchased by international buyers, thereby reducing foreign interest in these instruments.

The same effect could be achieved, Miran argued in a paper last November, by forcing countries to swap their holdings of US Treasuries for 100-year bonds. In return they would receive security guarantees.

Hardly anyone would argue against the notion that such approaches would automatically trigger significant disruptions in US debt markets and severely hamper the federal government’s capacity to finance its growing budget shortfall.

Another strategy could involve mandating that the US Federal Reserve sells dollars for foreign currencies without restriction; however, the impact this might have on the country’s internal monetary framework remains uncertain.

These opinions are not considered extreme within the Trump administration. Scott Bessent, who serves as the US treasury secretary, has independently advocated for a concept similar to a new Bretton Woods agreement. This plan aims to adjust global currencies in a way that would reduce the competitive disadvantage faced by American manufacturers.

The US is by far the biggest buyer of goods in the world; it’s about time, Bessent’s aides say, that the rest of the world started treating the US with the same respect that a business would reserve for its largest customer, and stop ripping Americans off.

As the previous week came to an end, Trump’s trade conflict appeared to be escalating uncontrollably. Both the European Union and Canada appear ready to confront , responding with equivalent retaliation to whatever actions Trump takes against them.

As I mentioned, there isn't anything novel in our current world that hadn't occurred previously. The entire horrific, polarizing situation unfolding before us was accurately predicted by the British economist John Maynard Keynes. This predicament is essentially an outcome of the US dollar being a global reserve currency.

In essence, this necessitates the US to incur significant fiscal and trade deficits to provide the necessary dollars that the global economy needs.

Keynes proposed creating an independent international reserve currency, naming it "bancor," but this idea failed to gain traction.

Moreover, wouldn’t Trump be hesitant to relinquish the U.S. dollar’s "exorbitant privilege"? It’s safe to assume that he wouldn’t. Additionally, there doesn’t appear to be much inclination on his part to pursue balanced budgets, which could potentially alleviate the trade imbalance.

There’s no telling where this will end. Badly, would be a reasonable guess.

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