After initiating a trade war globally, U.S. President Donald Trump has now shifted his focus to the American dollar. He believes that the strong dollar is responsible for the manufacturing crisis in the U.S. and aims to address this issue. The strength of U.S. capital markets has made the dollar a safe bet for investors. It’s no surprise that 59% of the reserves held by central banks around the world are in dollars. Furthermore, nearly half of global trade is conducted in U.S. dollars.
Dollar Index Drops 5.7% This Year
In mid-January, the Bloomberg Dollar Index reached a multi-year peak of 109.96. Since then, it has dropped by 5.7%, currently standing at 103.72. The reasons behind this decline are not hard to identify. Trump’s tariff announcements have caused significant damage to consumer spending in the U.S., slowing down the economy, and the threat of a recession looms. The labor market has also seen considerable decline. Markets now expect the Federal Reserve to cut interest rates soon.
Trump’s Longstanding Demand for a Weaker Dollar
For a long time, Trump has advocated for a weaker dollar alongside higher tariffs to boost U.S. manufacturing. Vice President JD Vance argues that a strong dollar acts like a tax on American manufacturers.
Senior U.S. officials have also discussed imposing fees on foreign buyers of U.S. assets, including popular Treasury bonds. Their argument is that this would make U.S. Treasury bonds unattractive and lead to a weaker dollar.
The ‘Mar-a-Lago Agreement’ Considered
Media reports suggest that, similar to the 1985 ‘Plaza Agreement,’ there are discussions about a ‘Mar-a-Lago Agreement.’ In September 1985, officials from the U.S., U.K., France, Japan, and West Germany met in New York and agreed to stabilize the value of non-U.S. dollar currencies after the dollar had increased by 50% over five years. This led to a significant drop in the value of the dollar.
Current Situation More Challenging
Trump’s unilateral strategy of imposing tariffs has halted opportunities for cooperation with his allies. Unlike 1985, his allies are not in a position to come together to tackle the crisis.
Weaker Dollar Would Benefit India
In this equation, China also plays a crucial role. China is unlikely to let its currency strengthen, as it would harm its exports. Emerging markets like India benefit from a weaker dollar, as their imports become cheaper, and capital inflows increase. However, these countries do not have the power to assist Trump. Experts warn that any artificial attempt to weaken the dollar would be costly and destabilizing.