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U.S. President Donald Trump has long been of two minds about the dollar. He has said he wants it weaker to make American products cheaper in global markets, but he has also said he wants it strong so it remains the world\u2019s dominant reserve currency.<\/p>\n
Those two objectives never made sense together. And now, as his tariff war threatens the U.S. economy, we\u2019re seeing reality bite. Trump is getting the weakness he wants. The dollar has fallen<\/a> 5 percent against other major currencies since his inauguration in January. But the strength he promised is nowhere to be seen.<\/p>\n Last year, one of Trump\u2019s key advisors, Stephen Miran, imagined<\/a> a so-called Mar-a-Lago Accord in which the United States would essentially require its trading partners to help bring down the dollar\u2019s value. That would have been, the theory goes, engineering a devaluation from a position of strength.<\/p>\n Instead, the dollar is falling because of perceptions of American weakness. Investors are worried that in the short run, the trade war will cause a recession in the United States, and that in the long run, loss of confidence in the United States will jeopardize the dollar\u2019s role at the center of global commerce. \u201cThe blowback of U.S. tariffs onto the U.S. domestic economy leaves the dollar naked,\u201d Chris Turner, ING\u2019s global head of markets, wrote in a client note.<\/p>\n Trump is right that a strong dollar is a mixed blessing. By making imports cheaper and exports more expensive, it hurts workers in businesses that compete in global markets. Trump has vowed to reverse what he calls the hollowing out of the American economy, and bringing down the dollar is, along with tariffs, a key part of his platform.<\/p>\n But a strong dollar also lowers prices for American consumers. And the conviction that the United States will preserve the dollar\u2019s value is a key reason that other nations have been willing and eager to hold dollars as emergency reserves and to use the U.S. currency in international transactions.<\/p>\n According to a Brookings Institution\u00a0analysis<\/a>\u00a0last year, dollar assets are 59 percent of global foreign exchange reserves, and the dollar is used in 58 percent of international payments, excluding payments within the eurozone. That\u2019s even though the U.S. share of global economic output has shrunk to about a quarter.<\/p>\n That dominance gives the United States important geopolitical leverage. In a Nov. 30\u00a0post<\/a>\u00a0on Truth Social, Trump warned Brazil, Russia, India, China, and South Africa not to challenge the dollar. \u201cThey will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar,\u201d he wrote. If they do, he wrote, they \u201cwill face 100% Tariffs.\u201d<\/p>\n Trump\u2019s goal all along has been to shed the burdens of a strong dollar while keeping the good parts. Instead, burden-shedding has been far from painless. Import prices are\u00a0rising<\/a>, trading partners are retaliating against American exports, and Trump has pivoted from his first-term\u00a0message<\/a>\u00a0that \u201ctrade wars are good, and easy to win\u201d to\u00a0warning<\/a>\u00a0that \u201cthere\u2019ll be a little disturbance\u201d on the way to greatness.<\/p>\n In past episodes of economic turbulence, U.S. financial markets did relatively well because the United States was perceived as a safe haven for investors\u2014even in episodes such as the global financial crisis in which the United States was a main cause of the trouble. That\u2019s not how things are going this time. The U.S. stock market indexes have\u00a0fallen<\/a> right along with those of Europe, China, and Japan. That\u2019s more evidence that the United States is losing its privileged position in global finance. Investors and governments don\u2019t want to hold dollar assets if they\u2019re no longer a reliable storehouse of wealth.<\/p>\n The dollar\u2019s decline to date has been smaller than the drop in stock prices, to be sure, but the surprise is that the dollar has fallen at all. Economic theory says that when a country raises tariffs, its currency should ordinarily rise.<\/p>\n Why would tariffs strengthen the dollar? Supply and demand. The tariff initially reduces American demand for imports, so fewer dollars go abroad. When dollars are relatively scarce, their price in terms of other currencies goes up. The dollar\u2019s rise partially offsets the tariff\u2019s initial effect by making imports cheaper. The economist Olivier Jeanne\u00a0estimated<\/a>\u00a0in 2020 that tariff-related news explained about one-third of the decline in China\u2019s renminbi in 2018.<\/p>\n The notion that interventions in trade cause offsetting actions in the currency market is hardly fresh. In 1752, David Hume, the Scottish philosopher and economist, wrote that restrictions on exports \u201cserve to no other purpose than to raise the exchange against them.\u201d<\/p>\n The reason the dollar isn\u2019t rising in this episode, contrary to trade theory, is that fears about the health of the U.S. economy are putting downward pressure on the dollar, and that\u2019s swamping the upward pressure coming from predicted trade flows.<\/p>\n Trump\u2019s mixed feelings <\/span>about the strength of the dollar aren\u2019t the only contradiction in his trade policy. Trump has promised that tariffs will raise revenue (possibly enough to\u00a0eliminate the income tax<\/a>!) and also bring manufacturing jobs back to the United States.<\/p>\n But as with the weak\/strong dollar conundrum, those two objectives can\u2019t both be accomplished at once. If tariffs raise a lot of money, it\u2019s only because foreign goods are still coming into the United States. In that case, tariffs won\u2019t restore manufacturing jobs. Conversely, if tariffs do restore manufacturing jobs, it\u2019s only because they dry up the inflow of imports, which means they won\u2019t raise a lot of money. A basic economic principle is that you can\u2019t have your cake and eat it, too (despite what former British Prime Minister\u00a0Boris Johnson said<\/a>).<\/p>\n The Dutch economist Jan Tinbergen, were he still alive, could have told Trump that he\u2019s trying to accomplish too many things at once with tariffs. Tinbergen, who in 1969 received the first Nobel Memorial Prize in Economic Sciences, said that each policy target must have its own instrument. The intuition is that a pilot can\u2019t land at the average of two airports.<\/p>\n (In a recent appearance on CNN, U.S. Treasury Secretary Scott Bessent said that the conundrum could be solved with sequencing: At first there would be a lot of revenue from tariffs, but it would be a \u201cshrinking ice cube.\u201d Over time, imports would fall and domestic manufacturing would build up. Taxes on that economic activity would replace tariff revenue. OK, maybe.)<\/p>\n Then there\u2019s the perennial question of whether Americans or foreigners will bear the cost of the Trump tariffs. On paper, the tariffs are paid at the point of importation, but that doesn\u2019t answer the question of who ultimately bears their cost. Bessent thinks he knows. Echoing his boss, he told<\/a> CBS News in early March that China \u201cwill eat any tariffs that go on.\u201d<\/p>\n But that all depends on which side has market power, economists say. If a Chinese producer feels it must swallow the cost of the tariff to retain its American customers, then it will bear the full cost of the tariff. That\u2019s Bessent\u2019s scenario. On the other hand, if the Chinese producer can get away with pushing the cost of tariffs onto its customers, then the final price will go up by the amount of the tariff, and Americans will bear their full cost.<\/p>\n The reality is most likely somewhere between those extremes. China and other exporters didn\u2019t \u201ceat\u201d the tariffs the last time Trump was president. Americans did. \u201cU.S. tariffs continue to be almost entirely borne by U.S. firms and consumers,\u201d the economists Mary Amiti, Stephen J. Redding, and David E. Weinstein found in a\u00a02020 article<\/a>\u00a0about the tariffs imposed in 2018 and 2019.<\/p>\n Many mainstream economists agree that tariffs can be legitimate tools in certain circumstances. For example, the World Trade Organization\u00a0allows<\/a>\u00a0countries to levy tariffs to protect themselves from unfair practices by trading partners, such as subsidies. Some economists also defend tariffs that protect \u201cinfant industries\u201d\u2014ones that need to be sheltered from competition as they get going.<\/p>\n Trump, though, sees tariffs not as necessary evils, but as good in their own right. He told NBC News recently that the 25 percent tariffs on imported cars are \u201cabsolutely<\/a>\u201d permanent. He also likes to use tariffs to achieve goals far removed from trade, such as cutting down on illegal immigration and fentanyl trafficking. Most recently, he\u00a0threatened<\/a>\u00a0to impose tariffs on countries that buy Russian oil if Russia thwarts efforts to reach a cease-fire in Ukraine.<\/p>\n It\u2019s hard to find a through line in Trump\u2019s thinking, but some of his advisors have tried.<\/p>\n The aforementioned Miran, who chairs Trump\u2019s Council of Economic Advisors, laid out in November a\u00a0framework<\/a>\u00a0for at least part of Trump\u2019s wide-ranging tariff agenda\u2014the Mar-a-Lago Accord. It included an attempt to square the circle on dollar valuation, laying out how the dollar could be cheapened while remaining the dominant currency for reserves and transactions.<\/p>\n Miran argued that the dollar is overvalued because other nations are accumulating dollars to invest in U.S. assets, and that as a result American industry has become hollowed out because its products are too expensive.<\/p>\n Miran acknowledged in the paper that cutting trade deficits would put upward pressure on the dollar, not weaken it. His solution is to form a coalition of the willing to intervene to push down the dollar\u2014against market forces\u2014in a modern version of the Plaza Accord of 1985 that lowered the dollar\u2019s value against the Japanese yen, the West German Deutsche mark, and other currencies.<\/p>\n High tariffs would give the United States \u201cnegotiating leverage\u201d to get trading partners\u2019 help in pushing down the dollar, Miran wrote. Trading partners that still didn\u2019t get with the devaluation program would face high tariffs and would risk losing the protection of the U.S. military, Miran added, in a\u00a0flourish<\/a>\u00a0that may well have endeared him to Trump.<\/p>\n Miran said any scenario for dollar manipulation would entail \u201ca much stronger demarcation between friend, foe and neutral trading partner.\u201d Bessent has used similar language, talking about placing countries in green, yellow, or red \u201cbuckets\u201d depending on their willingness to comply with American demands.<\/p>\n This spring, the economist Maurice Obstfeld analyzed the administration\u2019s tariff policy and dollar policy in a\u00a0paper<\/a>\u00a0presented at the Brookings Papers on Economic Activity conference on March 27. Obstfeld, a professor at the University of California, Berkeley, is a former chief economist of the International Monetary Fund.<\/p>\n Obstfeld doesn\u2019t think much of the proposed Mar-a-Lago Accord. \u201cExchange rate effects are likely to be short-lived unless the promised changes in macroeconomic fundamentals are forthcoming,\u201d he wrote. Also, he wrote, \u201cIt is unclear why other countries would go along: few view their currencies as undervalued.\u201d<\/p>\n By igniting a tariff war with America\u2019s trading partners, Trump has entered a hall of unintended consequences. It is a disorienting place for an inexperienced traveler, with lots of dead ends, blind turns, and Escher-like stairs that seem to go up but are actually going down. The president could benefit from some expert guidance to find his way out.<\/p>\n<\/p><\/div>\n
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