NEW YORK – As tariffs continue to pose threats to the U.S. economy, one unusual consequence has emerged – a significant drop in the value of the dollar. Economists are concerned that this sudden decline in the dollar signifies a deeper issue related to confidence in the United States amidst President Donald Trump’s efforts to overhaul global trade.
The dollar’s long-standing dominance in international trade and as a safe haven asset has been carefully cultivated by administrations from both political parties for many years. This dominance has helped to keep borrowing costs low, project power internationally, and offer significant advantages that could be jeopardized if confidence in the U.S. diminishes. University of California, Berkeley economist Barry Eichengreen notes that global trust in the dollar, built over decades, can erode rapidly.
Since mid-January, the dollar has weakened by 9 percent against a basket of currencies, a notable and abrupt decline, reaching its lowest level in three years. Investors, uncertain about Trump’s policies, do not anticipate an immediate replacement of the dollar as the world’s reserve currency but rather expect a gradual decline. However, even a slow decline could lead to the loss of important benefits.
The strong demand for the dollar, driven by its use in international trade, has persisted despite a doubling of U.S. federal debt over the past twelve years. This demand for the dollar has allowed the U.S. government, businesses, and consumers to borrow at low rates, supporting economic growth and improving living standards. Additionally, the ability to exclude countries like Venezuela, Iran, and Russia from using the dollar gives the U.S. significant leverage.
The recent drop in the dollar has puzzled economists. Traditionally, tariffs would strengthen the dollar by reducing demand for foreign goods. However, in this case, the dollar has weakened, leading to increased costs for imported goods. This weakening dollar could prompt higher prices for goods like French wine and South Korean electronics, along with potential consequences such as higher interest rates on mortgages and car loans.
Concerns about the ballooning U.S. federal debt, currently at 120 percent of the annual economic output, coupled with uncertainty surrounding Trump’s policies and the Federal Reserve’s independence, have also contributed to anxiety about the dollar’s future role. As alternative currencies and assets like cryptocurrencies gain traction, there is a growing sense of unease about the dollar’s long-held dominance and reserve status.
The unpredictability of Trump’s tariff policies and his criticism of the Federal Reserve have raised doubts about the stability and reliability of the U.S. as a secure investment destination. Economists are also wary of Trump’s approach to trade deficits and his potential impact on inflation. Some experts caution that the events unfolding under Trump’s administration could lead to a loss of international confidence in the U.S. dollar, mirroring historical examples of currency crises.