A flight from U.S. financial assets prompted by President Trump’s trade war is subsiding as the White House appears increasingly keen to strike a new trade deal with top U.S. trading partner China.
But the damage to the U.S. dollar in its capacity as the world’s major reserve currency may already be done, which could end up boosting the administration’s plan to boost domestic manufacturing production, bolster U.S. industry, and alter global trade flows.
Treasury Secretary Scott Bessent affirmed Wednesday the “strong dollar policy” that puts the U.S. currency at the center of global finance and has been a pillar of U.S. economic policy planning since the 1970s.
But he also said that it was “natural” for the use of the dollar in that capacity to come down over time.
“That the U.S. sits at the center of the global economy is enabled by the use of dollars, and it’s natural that the usage would come down over time,” Bessent said during an event at the Institute of International Finance.
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Bessent referenced remarks made Tuesday by European Central Bank vice president Luis de Guindos, who said that the euro could become a second reserve currency “in some years.”
U.S. dollar index DXY has been falling for the duration of Trump’s presidency, with notable drops after the biggest tariff announcements on April 2 and April 9. While higher tariffs should theoretically make the dollar more valuable, the downturn signals that investors are turning away from dollars and the assets they undergird, like U.S. bonds.
A weaker dollar can have a stimulating effect on the economy, especially for the exporters of domestically produced goods. But for consumers buying imports, a weaker dollar can mean an erosion of their purchasing power.
A weaker dollar would work in the interest of Trump’s goal of spurring a U.S. manufacturing revival, but administration officials have also expressed interest in a broader demotion of the dollar as the world’s primary reserve currency.
While weakening the value of the dollar has been a policy objective for the U.S. in the past, such as in the 1985 Plaza Accord that followed sky-high interest rates levels from the Federal Reserve, demoting the dollar’s reserve status is arguably a more substantial change and one that Trump administration officials appear to be pursuing now.
Global overreliance on the dollar has resulted in currency distortions, a devaluation of U.S. labor and products, and an entrenchment of trade deficits, which in turn fuel further demand for dollars, Stephen Miran, chair of the White House Council of Economic Advisers (CEA), argued earlier this month.
“Reserve status matters and, because demand for the dollar has been insatiable, it has been too strong for international flows to balance, even over [the last] five decades,” he said in remarks to the Hudson Institute.
Miran blasted conventional economic models that predict currency depreciation as a result of trade deficits, something that Miran said doesn’t hold up in the real world.
“That view is at odds with reality,” he said.
Dollar demand also underpins the roughly $50 trillion U.S. bond market, which saw a major sell-off and yield spike following Trump’s “Liberation Day” tariff announcement and prompted the administration to announce a 90-day pause on its country-specific tariffs sooner than it was originally planning.
About 60 percent of international deposits and bank loans are written in U.S. dollars, and about 70 percent of public bonds purchased in a currency other than a country’s home currency are denominated in U.S. dollars, according to researchers.
While reduced demand and a cheaper dollar may support Trump’s trade policies, investors say that a retrenchment in demand for U.S. debt, which would push up long term interest rates and make the already enormous U.S. debt stock more expensive, is likely not a part of the plan.
“A weaker dollar is something the administration would be quite OK with. What they’re not so happy about was that the bond market was selling off. Bessent is kind of forced to refinance again on the short end, even though he thought he could use an economic slowdown to refinance some of the debt into longer-dated date. He can still do that, but it’s not going to be as cheap as they thought it might be,” Axel Merk, founder of Merk Investments, told The Hill.
While the economic consequences of a comprehensive move away from the dollar and persistent U.S. trade deficits would be far-reaching, one of the main consequences could be a shift in the role of the U.S. consumer as the purchaser of last resort. Consumption in other parts of the world, including Europe and China, would likely gain in importance.
“Trade measures must be balanced against consumer interests,” former European Central Bank President Mario Draghi said in a report last year. “[In some cases] it would be preferable for the EU to [allow] foreign taxpayers to contribute to higher consumption by European consumers.”
While White House policies are jostling the place of U.S. financial assets in the global economy, U.S. central bankers have stressed the continued importance of the dollar, even in the face of economic fragmentation with China.
“While U.S. imports of tariff-affected goods from China have plunged, imports of goods not subject to tariffs have continued to rise,” Federal Reserve Governor Christopher Waller told the Bank of International Settlements in February. “Despite the reallocation of trade flows across countries, at the end of the day, those trade flows continue to be invoiced mainly in dollars.”
Other voices within international finance are sounding a much more troubled tone.
“Global institutions are getting weaker; international norms are eroding. More and more countries will act based on narrow self-interest, and use force or pressure to get their way,” Singapore Finance Minister Lawrence Wong said following Trump’s April 2 tariff announcement.
“We must be clear-eyed about the dangers that are building up in the world,” he said.
