February 18, 2025 - 1:00pm
Something strange is happening in world markets.
Conventional economic theory presumes that US tariffs will strengthen the dollar. If American traders judge their customers will substitute local for imported goods, they’ll demand less foreign currency, reducing its value against the greenback. However, the flurry of tariff announcements since Donald Trump took office last month has apparently had the opposite effect, and is weakening the dollar.
In itself this isn’t cause for alarm. Indeed, by making imports more expensive it could help the President to meet his goal of reducing the trade deficit, thereby providing short-term benefits to the US economy.
But there is some concern as to what is driving this decline, because it may actually be a symptom of a deeper malaise. The weakening dollar overlaps both with a continuing rally in the price of gold, which is now setting all-time highs, and with the rotation out of US assets, as the dynamism in world stock markets shifts from the US to Europe, Asia and elsewhere. The gold rally is driven both by central bank and retail buying, while the rotation out of the US market is apparently being undertaken by foreign investors repatriating money. But taken together, it seems to indicate that the world is starting to hedge against the possibility the US will turn permanently inwards.
These are subtle shifts which time may reveal to be purely cyclical. Were, say, Donald Trump to roll back his tariffs, investors might well return to the US. Indeed, the expected hit from tariffs to both corporate profits and the economy as a whole has not produced major falls in US share prices, suggesting that investors have already concluded that Trump won’t follow through on his threats.
All the same, the value of the dollar merits watching, because it’s possible a structural change is beginning. Although the US’s share of global trade is less than its share of global output, the country remains central to the world economy because it is its biggest importer. It’s able to run a chronic trade deficit because everyone else is willing to take IOUs, which they then treat as cash — essentially, the US credits the accounts of foreign governments on the implicit understanding the US will one day come good on its debts. Since nobody calls in the debts, the world economy can keep humming on the credit extended to the US.
Put simply, the stability of the world economy rests on a shared understanding: the world lends the US money to buy its goods. That loaned money is then invested in the US economy, in stocks, bonds and real estate, pushing asset values up and interest rates down, giving Americans the financial wherewithal to keep buying.
In his determination to reduce the trade deficit, though, Donald Trump threatens to upend this arrangement. If their US reserves drop, foreigners will have less to invest in the US. Not only could this potentially slow the US economy, but it could reduce the growth of the global dollar supply. Were America to turn inward permanently, its status as the keeper of the global reserve currency could one day even come into doubt.
If it’s this possibility for which forward-looking fund managers and central banks are preparing, then what’s happening right now to the dollar may be an early warning of what’s to come. For the foreseeable future, lacking any serious rival, the US dollar will remain the global reserve currency. But it may just be that we’re in the earliest stages of an epochal change in the world economy, as investors start contemplating radically different futures.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeIs the US dollar actually weakening against other currencies or is gold just rallying. Because quite frankly even if the US is in a worse spot than usual it still seems like the best bet in town. Whose the alternative? The European outlook isn’t any better and seems on a worse trajectory, you’ve got BRICs, except Russia isn’t going to be a major player in anything for a whole, China has its own internal troubles not to mention staring down the barrel of a massive demographic crises. South America has the long term stability of a 3 legged drunk donkey as far as governmental trust goes.
For the time being I’d be sticking with the USD.
Again you don’t know China like most westerners relying on the lying Zionist media. Your comments on it is thus based on ignorance’
my dear John Galt,
Just look at your house and see where everything is made – that is the country controlling the system but you are told not to believe your eyes!
China prides itself always having currency lower than the US on purpose. I could get into it and about why, but I am sorry I cannot fill the failure of education over millennia!
Sorry… where’s the dynamism in European stock markets? Certainly not in London.
Asia maybe.
US tariffs versus retaliatory tariffs perhaps, which the currency markets are factoring in.
The US has long traded on its own goodwill. The fact that it could always act this way, but didn’t, was its real strength. What we’re seeing now isn’t power; it’s weakness disguised as bravado. It’s making them unreliable. They’re calling in all their chips, but once you do that, they’re gone.
The US was valuable because it was seen as reliable, benevolent, and trustworthy. If it becomes just as chaotic – if not more so – than China, Russia, or anyone else, and if trade agreements, alliances like NATO, or any other commitments can no longer be counted on, that value disappears. People will look elsewhere for stability.
There seems to be this idea that they can push up to the edge of mistrust and still get what they want – but even that assumes the trust isn’t already broken. Once people no longer feel comfortable relying on them, they lose the very thing that made them dominant in the modern world. And I think that’s already gone.
Is the dollar weakening?
The dollar index may be down 1.7% over the month but it is up 5.9% in the last 6 months…
When I recently heard that Trump was granting refugee status to white South Africans, I immediately suspected that the U.S. dollar was in trouble. South Africa is a key exporter of raw materials essential for U.S. technological manufacturing, meaning the U.S. actually relies on South Africa. U.S. exported $6.85 billion to South Africa in 2023 imported $13 billion.
Yet, Trump’s move to welcome white South Africans seemed designed to create discord within SA. It’s a strange strategy if you think about it—why deliberately stir tensions in a country where white South Africans make up only about 7% of the population and no longer hold significant political power? Apparently they refused and rightfully so!
I believe the real issue was that Trump realized South Africa was selling its resources to the U.S. for dollars, but those dollars weren’t flowing back into the U.S. economy—they were being diverted elsewhere. This signaled a deeper problem with the dollar: while many countries still use the dollar in trade with the U.S., they are increasingly bypassing it in transactions among themselves. These shifts are happening in smaller, less visible industries that haven’t yet caught America’s attention or the media does not want to focus for fear of creating panic. The media rarely discusses transactions happening outside of the SWIFT system, and that’s exactly why we’re being distracted from these developments.
The dollar’s decline won’t be sudden, but just like COVID took five years to fully reveal its impact, give it time—before long, the average person will start to feel the pinch!
Don’t invest in anything on basis of this superficial maybe maybe.
Test – due to Comments section catastrophe
Things have improved – Editing functionality now returned also
An interesting article but seeing the new style comments sections is utterly deflating. By this bizarre change they have ruined the Unherd reading experience. What a great pity. The quality of articles is often excellent but so too was the quality of the discussion below – it was all part of the pleasure of reading Unherd.
For some reason it appears Unherd’s management has taken a dim view and come up with this ruse to scupper comment and debate between readers. Not a great idea. Quite unpleasant.
It’s bizarre.
The comment votes served three very useful functions: 1) the most liked/popular comments appeared at the top, 2) it was far easier to understand the general reaction and 3) it encouraged people to comment and discuss comments.
This “flattening” of the comments (they are know shapeless and hard to absorb) is indeed a catastrophe (as Ian Barton labelled it). We will lose a lot of the debate and interaction that’s made the comments section so valuable. I think – on the whole – the standard of comments here is very good and people should be trusted to coninue with a system that wasn’t broken.
Note also that all the votes have been removed now from comments before the change today.
Happy to see it’s all back to normal now.
it seems normal for me now
You Americans chose a maniac to be your leader. A criminal rapist racist con artist and now certainly Europe canada Mexico and others will never trust you until this orange t**d is gone and I mean gone for good. 6 times bankrupt and a compulsive liar the world won’t miss him or his republicans who support him and musk. Now stew in your own mistakes Like we had too with farage and Boris and disastrous brexiteers. We’re now get back closer to Europe in uk thank goodness.
He’s using tariffs as a tool to compel foreign central banks to adjust their interest rates, which would allow the dollar to depreciate.
absolutely correct. Worth reading the explainer on this by Steve Miran (now chief US Economic advisor) where he details how they will do it -and the risks.