In a stunning reversal of decades-old U.S. economic policy, President Donald Trump is deliberately weakening the U.S. dollar in a bid to boost exports and narrow the trade deficit. But what this really means is a dangerous erosion of America's central role in the global financial system - with potentially severe long-term consequences.
Undermining the Dollar's Primacy
For over 75 years, the U.S. dollar has been the world's preeminent reserve currency, used in the majority of international transactions and holdings. This "exorbitant privilege," as former French President Valéry Giscard d'Estaing once put it, has given the U.S. outsized influence and afforded it economic advantages like lower borrowing costs. But Trump's relentless attacks on the Federal Reserve and calls for a weaker dollar are chipping away at this foundation of American power.
As The Wall Street Journal reports, a lower exchange rate is "one more lever for the U.S. to boost growth, but it chips away at America's traditional role as a safe haven." And the Los Angeles Times notes that Trump's "erratic policymaking" is "rattling overseas allies and investors" and fueling fears of the dollar's decline.
Courting Disaster?
The danger is that Trump's attempts to deliberately weaken the dollar could backfire spectacularly. As The Conversation explains, the immediate risk is higher inflation in the U.S. if the Federal Reserve is forced to cut interest rates too quickly. But the bigger picture here is the potential unraveling of the dollar's status as the global reserve currency.
This would be a geopolitical earthquake, stripping the U.S. of a key source of economic power and influence. It could lead to higher borrowing costs, reduced purchasing power for American consumers, and the potential for financial instability as the world financial order is reordered. As one expert told The New Republic, "What it typically takes to be a reserve currency is a deep and liquid market—which the U.S. has unquestionably—clear rule of law, and policy predictability. And the latter two are a lot less clear these days."
Trump may think a weaker dollar will give the U.S. an edge, but the long-term costs of his reckless approach could be devastating for American economic dominance. The world is watching as the president chips away at a pillar of U.S. global power.