As for the question of whether President Trump can weaken the dollar, the answer is clearly yes.
However, whether doing so will strengthen the United States’ export competitiveness and strengthen the United States’ trade balance is an entirely different matter.
Also read: President Trump’s trade approach could be more destructive than helpful to America and the world
An aggressive approach to pushing down the dollar would require relying on the central bank, the US Federal Reserve, to ease monetary policy.
Mr. Trump will replace Federal Reserve Chairman Jerome Powell and could push Congress to change the Federal Reserve Act to force the central bank to take marching orders from the executive branch. If that happens, the dollar value will fall significantly, but that’s probably the point.
However, the Fed will not act in silence.
Monetary policy is decided not only by the chairman but also by the 12 members of the Federal Open Market Committee (FOMC). Financial markets, and even the House of Representatives, will likely think that giving up the Fed’s independence or filling the FOMC with obedient members is a bridge too far.
And even if President Trump were to succeed in “taming” the Fed, easy monetary policy would accelerate inflation and neutralize the effects of a weak dollar exchange rate. Neither America’s competitiveness nor its trade balance will improve.
Alternatively, the U.S. Treasury could use the International Emergency Economic Powers Act to tax foreign government holders of Treasury securities and withhold a portion of the interest payments.
That would make it less attractive for central banks to accumulate dollar reserves and reduce demand for dollars.
Such a policy could be universal, and could be exempted by friends and allies of the United States, as well as by countries that obediently limit further accumulation of dollar reserves.
The problem with this approach to a weaker dollar is that it reduces demand for U.S. Treasuries, causing U.S. interest rates to rise.
This drastic step could actually significantly reduce demand for U.S. Treasuries. Foreign investors could be induced to not only delay the accumulation of dollars but also liquidate their existing holdings completely.
And while President Trump may threaten tariffs to prevent governments and central banks from drawing down their dollar reserves, a significant portion of the U.S. government’s debt (about one-third) is held overseas. are owned by private investors and are not easily swayed by such policies. Tariff.
Also read: How China and India will survive President Trump’s ‘tariffs and tariffs only’ proposal
In a more traditional manner, the U.S. Treasury could use dollars from the Exchange Stabilization Fund to purchase foreign currencies.
However, increasing the supply of dollars in this way results in inflation. The Fed would respond by draining those same dollars from the market, sterilizing the effect of the Treasury’s actions on the money supply.
Experience has shown that this combined Treasury-Fed strategy, known as “sterilization intervention”, has had very limited effects. These effects become significant only when the intervention signals a change in monetary policy, in this case a change in a more expansionary direction.
Given that the Fed remains faithful to its 2% inflation target, there is no reason for the Fed to move in a more expansionary direction – assuming its continued central bank independence. –.
Finally, there is talk of the Mar-a-Lago Accord, an agreement among the United States, the eurozone, and China that would build on the historic Plaza Accord and make coordinated policy adjustments to weaken the dollar.
Complementing the measures taken by the Federal Reserve, the European Central Bank, and the People’s Bank of China, interest rates could rise.
Alternatively, Chinese and European governments could intervene in foreign exchange markets and sell dollars to strengthen their currencies.
Like Richard Nixon using import surcharges to force other countries to revalue their currencies against the dollar in 1971, or former Treasury Secretary James Baker raising the threat of U.S. protectionism in 1985 to create the Plaza Accord. Trump may use tariffs as leverage, as he did with the agreement. .
However, in 1971, growth in Europe and Japan was so strong that their reappraisal was not an issue. In 1985, inflation, not deflation, was the real and present danger, and Europe and Japan were trending toward monetary tightening.
In contrast, the euro area and China currently face the dual fears of stagnation and deflation. The dangers to the economy from monetary tightening will have to be weighed against the damage from President Trump’s tariffs.
Faced with this dilemma, Europe will likely cave in and accept tight monetary policy in return for President Trump’s tariff repeal and maintenance of security cooperation with the United States.
However, China, which views the United States as a geopolitical rival and seeks to decouple it, will likely take the opposite path.
Also read: US, China and India must pursue policies aimed at common global interests
The envisaged Mar-a-Lago agreement would therefore degenerate into a bilateral agreement between the United States and Europe that would bring little benefit to the United States and greatly harm Europe. ©2025/Project Syndicate
The author is a professor of economics and political science at the University of California, Berkeley, and author, most recently, of “In Defense of the Public Debt.”
