It's evidence of how far alarm about the decline of the dollar's global role has spread that even Liz Truss, whose salad days as UK prime minister lasted less than seven weeks, cites it as one of her major fears. Then again, given Truss's record on understanding financial markets and delivering a stable currency, you might also say that's strong evidence that the concerns are misplaced.
Indeed, although there seems to be a fresh round of concern that upward pressure on prices, geopolitical risk and the US's foreign entanglements will drag the currency down and reduce its global influence, so far there isn't much evidence of it. The dollar strengthened last week as forecasts of Federal Reserve interest rate cuts were scaled back in light of unexpectedly high inflation. It's a currency's normal reaction to interest rate differentials. If there were fears US inflation was getting out of control and shaking confidence in monetary policy we might expect to see it weakening, not strengthening, and the prospects for American growth underperforming rather than outperforming other economies.
In fact, recent episodes of heightened geopolitical and financial market stress have tended to show the dollar's role as a safe haven has survived, even when the damage is self-inflicted. The currency even rallied, or at least held its own, when the US Congress threatened to default on Treasuries during the debt-ceiling crises of 2021 and 2023.
The most recent call from inside the house is the prospect, discussed in a story in Politico this month, of an incoming Trump administration trying to use a dollar devaluation to reduce the trade deficit, especially with China, on top of the tariffs it imposed during the first term. In reality, a resumption of the currency wars of the 2000s and 2010s is unlikely to do much to reduce the US deficit nor undermine the dollar's global role in bank funding, payment systems and reserves.
There were some slightly halfhearted attempts to press trading partners on currencies during Donald Trump's first term. His administration accused China and Vietnam of manipulating their currencies, moves that had the approximately zero effect that sensible people had predicted they would. It inserted a section on currency manipulation into the rewritten Nafta agreement with Canada and Mexico, but those have floating exchange rates in any case.
As it happens, the dollar actually strengthened overall during the Trump administration. Theory dictates that currencies should rise in response to the imposition of import tariffs, since nominal exchange rates adjust to offset the change in competitiveness. (Macroeconomic policy in an open economy is hard.) Research by the economists Olivier Jeanne and Jeongwon Son notes that in 2018-19 the US imposed new tariffs of 15 per cent on average on its imports from China, but the renminbi depreciated by 7 per cent against the dollar. The authors suggest the Trump tariffs were responsible for a fifth of the dollar's effective (ie trade-weighted) appreciation and two-thirds of the renminbi's effective fall during his time in office.
Switching the explicit focus of policy to weakening the currency is going to be hard, especially if Trump also continues to impose new tariffs that will tend to lift the exchange rate. Unless he seizes control of the Federal Reserve and orders it to loosen monetary policy or facilitate large-scale currency intervention, there isn't much scope for unilateral depreciation.
And any Trump plea for international co-operation will get a hollow laugh. Barack Obama's administration, which rode a massively larger wave of global goodwill than Trump's, spent years in the IMF and G20 asking other governments to pledge to reduce current account imbalances and avoid competitive currency devaluations. It completely failed.
It is, of course, possible that a Trump administration would manage to trash the US economy and government so badly that it finally weakens confidence in the system underpinning the dollar. Perhaps a truly dysfunctional Congress might actually default on Treasuries during a debt-ceiling crisis, at which point all bets are off — though such events tend to involve a Republican Congress trying to exert pressure on a Democratic administration.
But it's really remarkable how, bar some small-scale bilateral deals in other countries to evade US financial sanctions, the dollar has remained the default for the world's financial plumbing, banking and reserves.
Inflation is coming down more slowly than expected. That's a manageable challenge for monetary policy, not an overall crisis for the currency. By itself, a Trump White House turning exchange rate warrior as well as tariff warrior won't finish the dollar's status. It's more likely to end up as a wrong-headed administration once again flailing about with policy it appears not to understand, and testing without breaking the remarkable resilience of the currency it has inherited.
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