Trump’s Plan to Weaken the US Dollar

The Future of the US Dollar: Potential Scenarios

Donald Trump has stated his intention to reverse the strong dollar policy that has supported the US economy since the early ’90s.
His vice-presidential pick, JD Vance, goes even further.
The Ohio senator aims to eliminate the dollar’s role as a global currency.
In 2023, Vance explained, “The strong dollar is a sort of sacred cow of Washington consensus, but when I look at the American economy, I see on one hand our massive consumption of mostly useless imports and on the other our hollowed-out industrial base, I wonder if the reserve currency status also has downsides.”

Recent Developments

A reduced global role for the US dollar is not entirely implausible.
Recent developments have made this epochal change more likely than in previous decades.
Firstly, the US has aggressively used its currency as a weapon against geopolitical rivals, notably freezing Russia’s dollar reserves after the 2022 invasion of Ukraine.
This has led central banks to diversify their reserves, reducing the US dollar’s share of global reserves to 59%, down from 73% in 2001.

International bodies have intensified efforts to develop viable alternatives to the dollar-based payment system on which global trade relies.
The Bank for International Settlements is currently testing one of these systems, Project Agora, to link seven payment systems managed by OECD members.
Another initiative, mBridge, aims to provide seamless settlements using central bank digital currencies, including the Chinese renminbi.

Challenges and Opportunities

A third reason to take seriously the prospect of a change in the global monetary regime is that the current system is relatively new.
It was only in 2022 that financial regulators completed the global credit migration from a model based on unsecured loans priced on the LIBOR to one based on secured loans and the new SOFR.
However, the dollar remains unique in many aspects.
The US financial markets are by far the largest and most liquid globally, and a significant proportion of international trade bills are in dollars.

Nevertheless, the value of the dollar against other currencies is a different matter.
It is undeniably historically strong, having increased by over 30% in the last decade and nearing a 40-year high in real and trade-weighted terms, according to BIS calculations.

Potential Impacts of Trump’s Policies

Trump’s proposed policies are unlikely to reverse this trend.
His trade measures, such as imposing tariffs on imports and potentially causing inflation, are expected to reinforce the dollar.
The same goes for his planned tax cuts and corporate tax reductions, which could further strengthen the currency.

Supporters of Trump are considering unconventional strategies, including capital controls to curb foreign investors’ demand for US assets and dollars.
Limiting the Fed’s independence and negotiating international monetary agreements might also be on the table.

While a weaker dollar could benefit some sectors of the US economy and debtor nations in the emerging world, support for such a shift remains uncertain.
The days of the dollar’s strength are numbered, regardless of the outcome of the presidential election.
The roles and dynamics of the US dollar in the global economy are set to undergo significant changes in the coming years.