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Strange sell-off in the dollar raises specter of investors losing trust in
U. S. under Trump
Among the threats tariffs pose to the U. S. economy, none may be as strange
as the sell-off in the dollar.
Currencies rise and fall all the time because of inflation fears, central
bank moves and other factors. But economists worry that the recent drop in
the dollar is so dramatic that it reflects something more ominous as
President Donald Trump tries to reshape global trade: a loss of confidence
in the U. S.
The dollar's dominance in cross-border trade and as a safe haven has been nurtured by administrations of both parties for decades because it helps
keep U. S. borrowing costs down and allows Washington to project power
abroad enormous advantages that could possibly disappear if faith in the
U. S. was damaged.
Global trust and reliance on the dollar was built up over a half century or more, " says University of California, Berkeley, economist Barry
Eichengreen. "But it can be lost in the blink of an eye.
Since mid-January, the dollar has fallen 9% against a basket of currencies,
a rare and steep decline, to its lowest level in three years.
Many investors spooked by Trump don't think the dollar will be pushed
quickly from its position as the world's reserve currency, instead
expecting more of a slow decline. But even that is scary enough, given the benefits that would be lost.
With much of world's goods exchanged in dollars, demand for the currency
has stayed strong even as the U. S. has doubled federal debt in a dozen
years and does other things that would normally send investors fleeing.
That has allowed the U. S. government, consumers and businesses to borrow
at unnaturally low rates, which has helped speed economic growth and lift standards of living.
Dollar dominance also allows the U. S. to push around other countries like Venezuela, Iran and Russia by locking them out of a currency they need to
buy and sell with others.
Now that exorbitant privilege, " as economists call it, is suddenly at
risk.
"The safe haven properties of the dollar are being eroded, " said Deutsch
Bank in a note to clients earlier this month warning of a confidence
crisis. " Added a more circumspect report by Capital Economics, It is no
longer hyperbole to say that the dollars reserve status and broader
dominant role is at least somewhat in question. "
Traditionally, the dollar would strengthen as tariffs sink demand for
foreign products.
But the dollar not only failed to strengthen this time, it fell, puzzling economists and hurting consumers. The dollar lost more than 5% against the
euro and pound, and 6% against the yen since early April.
As any American traveler abroad knows, you can buy more with a stronger
dollar and less with a weaker one. Now the price of French wine and South Korean electronics and a host of other imports could cost more not only due
to tariffs but a weaker currency, too.
And any loss of safe-haven status could hit U. S. consumers in another way: Higher rates for mortgages and car financing deals as lenders demand more interest for the added risk.
More worrisome is possible higher interest rates on the ballooning U. S. federal debt, which is already at a risky 120% of U. S. annual economic
output.
Most countries with that debt to GDP would cause a major crisis and the
only reason we get away with it is that the world needs dollars to trade
with, says Benn Steil, an economist at the Council on Foreign Relations. At some point people are going to look seriously at alternatives to the
dollar.
They already have, with a little help from a U. S. economic rival.
China has been striking yuan-only trading deals with Brazil for
agricultural products, Russia for oil and South Korea for other goods for years. It has also been making loans in yuan to central banks desperate for cash in Argentina, Pakistan and other countries, replacing the dollar as
the emergency funder of last resort.
Another possible U. S. alternative in future years if their market grows: cryptocurrencies.
Said BlackRock Chairman Larry Fink in his annual shareholder letter about dollar dominance, If deficits keep ballooning, America risks losing that position to digital assets like Bitcoin.
Not everyone is convinced that a big reason the dollar is falling is
because of lost faith in the U. S.
Steve Ricchiuto, an economist at Mizuho Financial, says dollar weakness reflects anticipation of higher inflation due to tariffs. But even if
investors arent as comfortable holding dollars, he says, they really don't
have much of a choice. No other currency or other asset, like yuan or
bitcoin or gold, is vast enough to handle all the demand.
The U. S. will lose the reserve currency when there is someone out there to take it away, " Ricchiuto says. "Right now there isnt an alternative.
Maybe so, but Trump is testing the limits.
It's not just the tariffs, but the erratic way hes rolled them out. The unpredictability makes the U. S. seem less stable, less reliable, and a
less safe place for their money.
There are also questions about his logic justifying the policy. Trump says
the U. S. needs tariffs to drive down its trade deficits with other
countries. But most economists believe those deficits, which measure trade
in goods, not services, are a bad measure of whether a country is ripping
off America, as Trump puts it.
Trump has also repeatedly threatened to chip away at the independence of
the Federal Reserve, raising fears that he will force interest rates lower
to boost the economy even if doing so risks stoking runaway inflation. That
is a sure fire way to get people to flee the dollar. After Fed Chair Jerome Powell said Wednesday that he would wait to make any rate moves, Trump
blasted him, saying Powells termination cannot come fast enough!
Economists critical of Trumps April 2 tariff announcement recall another
event, the Suez Crisis of 1956, that broke the back of the British pound.
The military attack on Egypt was poorly planned and badly executed and
exposed British political incompetence that sank trust in the country. The pound fell sharply, and its centuries-long position as the dominant trading
and reserve currency crumbled.
Berkeleys Eichengreen says Liberation Day, as Trump called it, could be remembered as a similar turning point if the president isn't careful.
This is the first step down a slippery slope where international confidence
in the U. S. dollar is lost. "
Copyright 2025 The Associated Press. All rights reserved. This material
may not be published, broadcast, rewritten or redistributed without
permission.
https://japantoday.com/category/business/strange-sell-off-in-the-dollar- raises-the-specter-of-investors-losing-trust-in-the-us-under-trump
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