Mint Primer: How will Trump’s next obsession, a weaker dollar, play out?

What makes the US dollar so strong?

The depth in US capital markets, the country’s commitment to rule of law and independent regulatory environment have ensured that risk of a sovereign default is very low, and this has made the dollar a safe bet for investors. It’s not surprising that the dollar accounts for 59% of the world’s central bank reserves. Also, about half of global trade is transacted in US dollars. In mid-January, the Bloomberg Dollar Index touched a multi-year peak of 109.96 as the US economy continued to post a strong show and markets were banking on a significant stimulus by way of tax cuts from the incoming Trump administration.

But why has the dollar weakened recently?

Between January and now, the dollar index, which tracks performance of the USD against a basket of 10 global currencies, has declined by 5.7% to 103.72. The reasons are not far to seek. Trump’s debilitative tariff actions has hurt consumer spending in the US slowing down the economy, with the possibility of a recession. The labour market has also cooled rather sharply. The markets now expect the Federal Reserve to cut interest rates soon, if not immediately. Rival currencies have strengthened—the euro 6% against the dollar over the past week as Europe eased borrowing limits to spend more on defence.

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A weaker dollar? That should please Trump

The world’s love for the dollar makes it pricey, and that, says Trump, makes US manufacturing uncompetitive. He has long called for a weaker dollar along with high tariffs to boost US manufacturing. Vice-president J. D. Vance argues that a strong dollar is a tax on US manufacturers and a subsidy to American consumers to mass consume “useless" imports.

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What exactly does Trump want to do?

Senior US officials are talking of a fee on US asset purchases, including the sought-after treasury bonds, by foreign players. This, they argue, will make US treasury bonds unattractive, helping weaken the dollar. Media reports suggest a ‘Mar-a-Lago Accord’ like the 1985 ‘Plaza Accord’ is being considered. In September 1985, officials of the US, Britain, France, Japan, and West Germany met in New York and agreed to an orderly hike in non-USD currencies’ value after the dollar gained 50% in five years. It fell sharply soon.

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But this is 2025. Will such a step work?

Unlikely. With his unilateral tariffs, Trump has burnt the bridges with his allies. They are unlikely to play ball like they did in 1985. And then, there is China in this equation today. With a struggling economy, China will not allow its currency to strengthen and hurt its exports. Emerging markets such as India benefit from a weaker dollar as their imports become cheaper and capital inflows increase. But they lack the clout to help Trump. Experts warn that any artificial move to weaken the dollar will be both costly and unsustainable.

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