Dollar Sell-off Hints at Reduced Confidence in US Leadership

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    NEW YORK — Among the unconventional threats that tariffs pose to the U.S. economy lies the curious case of the declining U.S. dollar.
    The value of currencies can fluctuate due to factors such as inflation concerns and central bank policies. However, the marked drop in the dollar is causing worry among economists, as it seems to signal a more serious problem related to President Donald Trump’s efforts to reshape global trade. Perhaps most concerning is the growing apprehension that there may be a waning trust in the United States.
    The global supremacy of the dollar in international trade and its status as a safe haven have been carefully maintained by American administrations over several decades. This status keeps U.S. borrowing costs in check and permits Washington to exert influence on the international stage—advantages that could diminish if trust in the country is undermined.
    “The global reliance on the dollar was built painstakingly over many years,” states Barry Eichengreen, an economist at the University of California, Berkeley. “But that trust can dissipate in an instant.”
    Since the middle of January, the dollar has seen a 9% decline against a basket of international currencies, marking a steep and historically uncommon fall, reaching lows not seen in three years.
    While many investors unnerved by Trump’s trade policies don’t expect a swift displacement of the dollar as the global reserve currency, they are bracing for a gradual descent that, in itself, is troubling given the potential loss of economic advantages.
    Despite the U.S. government and its entities having doubled their debt levels over the past twelve years—a trend that would typically alarm investors—the demand for the dollar has remained robust as it underpins a vast portion of global trade.
    This scenario has enabled the country, as well as American consumers and businesses, to secure loans at surprisingly low interest rates, aiding economic growth and elevating living standards. Furthermore, the supreme status of the dollar allows the United States to leverage its economic power to exert pressure on other nations, including those like Venezuela, Iran, and Russia, by restricting their access to a vital trading currency.
    However, this “exorbitant privilege,” as some economists term it, comes with increasing jeopardy.
    Intriguingly, the recent decline in the dollar challenges traditional economic theories. The dollar typically strengthens when tariffs diminish the demand for foreign products. Yet, in the current scenario, the dollar has weakened instead, baffling economists and affecting consumers adversely.
    The dollar has depreciated by more than 5% against the euro and the British pound, and about 6% against the Japanese yen since the beginning of April. For American tourists abroad, this weakening means reduced purchasing power, potentially making foreign goods like French wines and South Korean electronics more expensive, compounded by both tariffs and the currency shift.
    Moreover, any erosion of the dollar’s status as a safe haven could indirectly influence American consumers, as mortgage rates and car loan rates might rise due to lenders demanding higher interest to account for increased risk.
    Adding to these concerns is the mounting U.S. federal debt, which now equates to approximately 120% of the country’s annual GDP—a scenario that would typically incite a major crisis in other countries. The U.S. has so far avoided similar crises largely because the world relies heavily on the dollar.
    Benn Steil, an economist at the Council on Foreign Relations, warns, “At some juncture, the global community will seriously evaluate alternatives to the dollar.”
    Efforts to establish alternatives are already unfolding, with China having established yuan-based trading agreements with countries like Brazil and Russia for specific resources. Additionally, China is extending yuan loans to cash-strapped countries, increasingly substituting the dollar as a lender of last resort. There also lies the potential rise of cryptocurrencies as another future contender, should their market presence grow.
    Larry Fink, Chairman of BlackRock, emphasized this sentiment, warning in his annual shareholder letter that if U.S. deficits continue to surge, assets like Bitcoin could potentially overtake the dollar.
    Steve Ricchiuto, an economist at Mizuho Financial, presents a counterpoint, suggesting the dollar’s weakness mirrors expected higher inflation, a consequence of tariffs. Even in light of this, alternatives to the dollar appear limited, as he notes, “The U.S. will maintain its reserve currency position until a viable alternative surfaces.”
    Nevertheless, Trump’s approach continues to challenge economic norms. It’s not solely the tariffs but the unpredictable manner in which they are implemented that fosters instability and portrays the U.S. as a less reliable safe haven for investments.
    Additionally, questions arise from Trump’s rationale behind these tariffs. He argues that they will reduce trade deficits, asserting that these deficits reflect countries “exploiting” the U.S. He considers only the trade deficits in goods, disregarding services, where the U.S. excels. Most economists argue trade deficits don’t necessarily imply national weakness and are not detrimental to economic prosperity.
    Trump’s repeated attempts to undermine the Federal Reserve’s independence have further aggravated concerns, with speculation that he might push for reduced interest rates to bolster the economy, even at the risk of spiraling inflation—a scenario that would likely drive investors away from the dollar. After Fed Chair Jerome Powell indicated a pause in rate adjustments, Trump criticized him, implying an eagerness for Powell’s removal.
    Critics of Trump’s tariff policy invoke historical parallels, such as the Suez Crisis of 1956, to caution against potential missteps. This crisis, stemming from poorly conceived military actions, culminated in a loss of credibility for Britain and hastened the decline of the British pound as the world’s premier currency.
    Echoing these sentiments, Eichengreen remarked, “April 2 could mark a pivotal moment if the administration continues on this path, potentially jeopardizing the U.S. dollar’s international standing.”
    Overall, there’s a consensus that the time has come for a cautious approach to protecting the dollar’s enduring legacy. The choices made now could have far-reaching implications for the future global economic landscape.