A deal in a strong dollar can be very insensitive

Unlock the White House Watch newsletter for free

Your guide to what the 2024 US election means for Washington and the world

The author is the author of ‘Two Hundred Years of Planning: The Amazing Story of the British Economy’.

One common thread in the outlook for 2025 from banks and asset managers was the near-term view that the dollar will strengthen further over the next 12 months. As with much of the Trump administration’s upcoming agenda, the rhetoric surrounding the value of the greenback has been contradictory at times.

Donald Trump himself, along with his key trade policy advisers, have long argued that a strong dollar has boosted American exports, encouraged imports and paid for jobs. American production. However, some key appointees, such as Scott Bessent, who has been nominated for the post of Treasury Secretary, have publicly taken a traditional stance and supported a strong dollar.

Regardless of what the new administration may wish, markets seem convinced that the result will be a stronger dollar rather than a weaker one. The dollar has risen 8 percent since the end of September as investors began buying on the growing possibility of a Trump victory in November. A strong dollar has been a key factor in Trump’s winning trade on Wall Street over the past year. In general, Trump’s business is the idea that the new president will follow all the parts of his plan that the markets accept, while he is blocked by his main party from anything they don’t like.

Tax cuts and deregulation will increase profits and stock market returns while higher deficits will be negative, but not catastrophic, for US Treasuries. Markets expect U.S. government bond yields to rise relative to non-Trump but he clearly believes the rise will not be enough to derail the stock market. A rising interest rate differential with other advanced economies, however, with Trump’s trade philosophy, will be enough to push the dollar higher. The threat of higher tariffs, which could result in fewer dollars leaving the US, has added to the dollar’s strength since November.

Therefore, the consensus view is that the dollar will remain strong even if the new president occasionally takes to social media to moan loudly about it. However, there are at least three reasons to worry that this agreement is void.

Payments are first. Economic theory suggests that in the short term new tariffs can indeed lead to a stronger currency. The trading partner’s income under the new restrictions is often reduced to reduce, at least partially, the value of the fees. That was generally the case with the Chinese renminbi in 2018-19. But over time, tariffs are associated with a sharp decline in imports and exports and a weaker economy overall. That weakness ultimately leads to lower interest rates and thus less money. Tariffs may give the dollar a boost in the short term but weaken it in the long run.

Second, it is important to take seriously the fact that when Trump says he wants a weaker dollar, he really means it. The threat of higher tariffs on America’s main trading partners could prove to be a starting point in bringing those trading partners together for a multilateral agreement to devalue the dollar. There can be little doubt that the author of The Art of the Deal will not be happy to hold a meeting at Mar-a-Lago to lead negotiations. Of course, the mechanics of such a trade would be complicated. 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 considered a model. But the global economy is a very different place today. The five participants 40 years ago represented 45 percent of world GDP, excluding energy, between them compared to 25 percent today.

Another major threat to the value of the dollar can be found outside the traditional realm of economic policy. Work by economists Barry EichengreenArnaud Mehl and Livia Chitu in 2017 analyzed the geopolitical trends in international financial markets. In general, countries have a larger share of their budgets in national currency that provides a security guarantee. In this argument, the provision of US protection to its partners helps to maintain the value of the dollar and keep the borrowing costs of the US lower than they would otherwise be. If those security guarantees begin to deteriorate, the dollar’s share of international financial markets could begin to decline, providing further impetus.

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