NEW YORK (AP) — Recent declines in the value of the U.S. dollar have sparked significant concerns among economists and investors, as President Donald Trump’s aggressive trade policies raise questions about the stability of the world’s dominant currency.
The dollar’s recent decline, approximately 9 percent since mid-January against a basket of currencies, marks a dramatic shift with potential consequences for the U.S. economy and its position in global trade. The drop could signal a growing loss of confidence in the U.S., which historically has relied on the dollar’s strength to maintain its economic influence and low borrowing costs.
Economist Barry Eichengreen from the University of California, Berkeley, voiced his concerns, stating, “Global trust and reliance on the dollar was built up over a half century or more. But it can be lost in the blink of an eye.”
The dollar’s decline has perplexed many in the financial community, as traditional economic theory would suggest that tariffs imposed on foreign goods would strengthen the dollar by reducing demand for imports. However, the dollar’s value has plummeted in recent months, perplexing economists.
Deutsche Bank recently issued a warning to clients about what it described as a “confidence crisis” affecting the dollar. They noted that the attributes that make the dollar a safe haven are beginning to erode, while Capital Economics echoed similar sentiments, cautioning that the reserve status and broader dominance of the dollar is being brought into question.
A strong dollar typically benefits American consumers, allowing them to buy imports like French wine and South Korean electronics at lower prices. However, the current weakness of the dollar combined with tariffs could result in higher costs for many imported goods.
The impact of a declining dollar could also extend to the U.S. economy through increased borrowing costs. As lenders perceive greater risks associated with a weaker dollar, they may demand higher interest rates for loans, influencing mortgages and other forms of consumer financing.
The ballooning U.S. federal debt, which now stands at a concerning 120 percent of the annual economic output, is particularly alarming in this context. Benn Steil, an economist at the Council on Foreign Relations, remarked on the precarious situation, stating, “Most countries with that debt to GDP would cause a major crisis, and the only reason we get away with it is that the world needs dollars to trade with.”
Steil warned that alternatives to the dollar could emerge if confidence continues to wane, and such alternatives are already taking shape. China, for example, has made strides in establishing yuan-only trading agreements with various nations, facilitating trade without the use of the U.S. dollar.
Additionally, some financial experts, including BlackRock Chairman Larry Fink, speculate that the future of dollar dominance may also be at risk from the rise of cryptocurrencies, such as Bitcoin. Fink expressed concern that persistent trade deficits could jeopardize America’s standing as the primary reserve currency.
Despite the concerns raised about the dollar’s future, not all economists attribute the currency’s decline to a loss of faith in the U.S. economy. Steve Ricchiuto, an economist with Mizuho Financial, suggested that the dollar’s weakness may be more closely tied to inflationary concerns stemming from tariff implementation rather than a definitive lack of confidence.
Ricchiuto added, “The U.S. will lose the reserve currency when there is someone out there to take it away. Right now there isn’t an alternative.”
It’s worth noting that even amid the current turmoil, the dollar remains unmatched by any other currency or asset class in terms of scale and liquidity. Nevertheless, the unpredictable nature of Trump’s tariff policies and their implications continue to make investors uneasy.
The erratic implementation of these tariffs has led to perceptions of instability, further affecting investor confidence in the U.S. economy. Critics of the Trump administration point to the flawed logic behind some of the tariff decisions, highlighting that trade deficits do not necessarily equate to economic weakness, particularly when considering the strengths of the U.S. services sector.
Moreover, ongoing tensions between Trump and the Federal Reserve raise alarms over potential political interference in monetary policy, which could amplify fears of rising inflation and prompt investors to abandon the dollar as a safe-haven asset. Trump’s repeated criticisms of Federal Reserve Chair Jerome Powell and his focus on keeping interest rates low have further fueled concerns.
Eichengreen drew parallels between the current situation and historic events, such as the Suez Crisis of 1956, which significantly diminished the British pound’s status. He cautioned that unless the administration reconsiders its approach, the U.S. dollar could face a similar fate, leading to a significant loss of international confidence.
As the global economic landscape continues to evolve, the looming question remains: will the U.S. dollar maintain its long-held crown as the world’s reserve currency, or are we witnessing the early stages of a significant shift in monetary power?
The implications of this uncertainty extend far beyond currency markets and threaten to reshape economic relationships on a global scale. Economists and policymakers alike will be closely monitoring these developments in the coming months to gauge their potential impact on not just the U.S. economy, but on economic systems worldwide.
image source from：https://www.pbs.org/newshour/economy/unusual-sell-off-in-the-dollar-raises-specter-of-investors-losing-trust-in-the-u-s-under-trump
