February 14, 2025 - 5:00pm
In a world where living standards and economic wellbeing decide the fate of political systems, the US dollar remains the most potent weapon in Washington’s geopolitical arsenal. Yet premature announcements of de-dollarisation abound. This week, the FT proclaimed that “’Trump trades’ start to misfire as dollar weakens.” It is true that the dollar has dipped recently, but is it fair to characterise the new administration’s policies as misfiring?
There are many reasons why China, Russia and the rest of the Brics-adjacent countries would want to get rid of — or at least weaken — the overly powerful dollar. However, the currency is still so potent that the Treasury Department must fine-tune it to avoid harming allies instead of enemies. In the world of commodities the bulk of trading is done in dollars, meaning most countries have to exchange their currencies for USD if they want to buy something on the world markets. The stronger the dollar gets, the more expensive commodities become for other nations, potentially threatening the health of their economies. This is fine for enemies, but not for allies.
There is an odd tendency to see every downturn of the dollar as something negative, as per the FT headline and countless others. The dollar has decreased by 0.2% this year; investors are understandably wary of Trump’s trade war and its potential consequences. While this might seem significant, it’s noteworthy that from September to November last year the dollar increased by 7.3% compared to many other currencies. A slight devaluation of the dollar is not a “misfiring” of economic policy — ups and downs are regular occurrences and part of the fine-tuning process.
While having a strong currency sounds desirable, having too strong a currency is not — and Washington has no interest in overusing the dollar as a “wrecking ball” for other economies. As with oil prices, there is a hypothetical sweet spot which works for everyone. In the case of oil, the sweet spot is when prices are low enough for industry and companies to perceive it as cheap, but high enough for it to be profitable to produce so that oil and gas companies keep drilling. A similar approach is applied when it comes to the dollar.
The strength of the dollar is often measured via the US Dollar Index (DXY), which describes its value relative to other currencies. The DXY is currently just shy of 108, and according to experts such as Brent Johnson the problematic area for other economies — where the dollar is too strong — would be 115. A look at the MarketWatch chart reveals that since the late Eighties the United States has tried to keep the dollar hovering around that value. Currency management is not an exact science, but the US Treasury’s intention is quite clear: remain the dominant currency and distribute economic pain across domestic and international markets.
None of this is to say that the dollar is immortal. All global currencies decline at some point, and so will the dollar. But inevitable does not mean imminent.
Ralph Schoellhammer is assistant professor of International Relations at Webster University, Vienna.
Raphfel
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SubscribeWhat will be interesting will be when/if Trump decides to attempt to intervene directly in treasury policy to use the currency to achieve policy objectives. The Treasury’s activities are largely insulated from direct interference, but Trump can use tariffs or just use the bully pulpit to state his desired policy and put the Treasury in the political crosshairs of his movement in a way that others have not dared to do. When one considers some of the policies he favors it would make sense to do so. He’s attempting to reverse the trend towards the de-industrialization and financialization of the US economy, but the strong, global dollar contributes to both. Devaluing the currency beyond what the Treasury has done over the past few decades might be something he attempts or wants to attempt to do. He will of course have to risk inflation to do it. I believe he is hoping that a possible AI economic boom and peace in the Ukraine will alleviate some of the inflation pressure and give him more room to maneuver.
What we really want is for the dollar to go down vs. the yuan, which will drive up the relative cost of imports and put pressure on the Chinese economy that will already have to contend with tariffs. Part of what the Chinese have done to maintain their export based economy is to devalue their currency relative to the dollar. They could respond with further devaluation but if it comes to a t*t for tat, the Chinese economy has more to lose, as the end result would be a full on trade war and a more immediate decoupling. They might or might not be able to shift their exports elsewhere. Other economies would have to increase consumption and refrain from using protectionist measures to protect their own industry. The idea would be to reduce the overall viability of the Chinese export based system, and to leave them with too much productive capacity and not enough people to sell to, forcing a reconfiguration towards other goods that are demanded by other nations or domestic demand, and it’s unlikely to fully compensate for losing the US market and US consumers who are notorious for their reliable consumer spending. Ultimately, the idea is to make their system less profitable through a combination of tariffs and currency manipulation. The trick will be to keep price inflation down at the same time, or at least limit the inflation to things other than basic necessities like food and energy. That at least is how I would play it. Not sure what Trump will do.
Not sure this article tells us anything at all.
We already know the Trump administration actively want a weak dollar. Indeed Steve Miran -the head of the US Economic advisory team – has laid out in considerable detail over 40 pages how they intend to do it.
The US needs a weak dollar to offset any hit from reciprocal tariffs. And to rebalance trade flows.
Hard to see the dollar $ falling any quicker than the pound sterling £ – or the Euro – due to their terrible economic mismanagement. Maybe the dollar will weaken against the genuinely advancing economies.
Is this true?
“The stronger the dollar gets, the more expensive commodities become for other nations, potentially threatening the health of their economies. This is fine for enemies, but not for allies.”
Have heard Canada or Mexico or ?
Now they are enemies!
I’m curious why the Pound Sterling is stronger in value than the Dollar. Is that a good thing or a bad thing?