The US dollar is rising as investors price in Trump’s policy platform of tariffs, tax cuts and deregulation. But key members of the new US administration want to see a weaker dollar. We discuss this fundamental dilemma at the heart of the new administration’s economic policy. How might the US exercise its full array of tools to achieve economic, political and territorial objectives?
Some highlights:
- Strong dollar? Donald Trump's economic policies, such as tariffs and fiscal stimulus, would normally be expected to strengthen the dollar through increased demand and higher interest rates.
- Weak dollar? Despite this, the administration would prefer a weaker dollar, believing the current international economic order leads to a systematically overvalued dollar and weaker US economy.
- The ‘Mar-a-Lago Accord’. There has been speculation about a new Plaza Accord – dubbed the 'Mar-a-Lago Accord' – to depreciate the US dollar, but key differences from the world in 1985 make this unlikely.
- Tariff threats. That said, the Trump administration could use tariff policy as leverage to negotiate another coordinated effort to strengthen other currencies against the dollar.
- Other unilateral action. The US could also weaken the dollar through measures like taxing US Treasury securities held by foreigners, although this carries risks for US deficit financing and the dollar’s reserve status.
- Melding economic and foreign policy. Beyond dollar policy, threatening tariffs, asking OPEC to lower oil prices, and even suggesting military action against Greenland or Panama, are all part of a new approach to economic and foreign policy from the US.
Listen to the latest episode of our Macro Bytes podcast for more insights.