The value of the US dollar is experiencing a slump, a trend economist Kenneth Rogoff suggests is accelerating due to policies enacted by former President Donald Trump and his advisors. The decline comes despite earlier expectations that tariffs would strengthen the currency.
Analysts like Brad W. Setser note that tariffs often theoretically argue that a tax on imports is effectively a tax on exports, which should support the dollar. However, recent trade measures have not produced the anticipated upward pressure on the currency, which has fallen approximately 10 percent against a group of G10 currencies.
Several factors may contribute to the dollar's performance. Some economists view tariffs as a form of consumption tax. This potential fiscal consolidation can lead markets to predict slower growth and lower interest rates from the Fed, making US financial assets less appealing.
A downturn in the US economy could also weigh on the dollar by reducing the attractiveness of US equities for foreign investors. Companies like Apple face tariffs on imported goods, impacting margins and the value of associated US assets. Firms paying higher "reciprocal" tariffs face even greater challenges.
Other nations' actions influence the dollar's standing. China, unlike previous periods, has shown reluctance to allow the yuan to depreciate significantly against the dollar, maintaining stability around long-term lows. This decision helps limit further dollar weakness.
European nations have also shifted economic stances. Germany, for example, has dropped its policy of self-imposed austerity and increased borrowing for security and infrastructure investments. Sweden and the Irish have also indicated plans for more spending. This fiscal easing supports European growth and increases the supply of euro-denominated assets like bunds, potentially diverting demand from dollar assets.
The "America First" policies pursued by the previous administration may diminish the global appeal of the dollar. Threats against American allies could introduce a risk premium into dollar assets. Allies fearing coercion might reconsider large investments in US holdings. Concerns have been raised whether Canadian public pensions should be heavily invested in the U.S. or if Danish pensions and reserves should remain heavily invested in dollars.
The dollar was notably strong in the years leading up to the policy shifts. That strength required increasing inflows and implied a shrinking US export base and a growing trade deficit. The current slide suggests a turning point for the currency.