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A guide to what the 2024 US election means for Washington and the world.
The author is a professor at Cornell University’s Dyson School and a senior fellow at Brookings University.
President-elect Donald Trump wants a weaker dollar to boost exports, protect American jobs from foreign competition and reduce the trade deficit. He also wants a strong dollar and will not stand in the way of any challenge to the dollar’s dominance in global finance.
If that were not contradictory enough, the new administration’s policies may be inconsistent with both of these intentions. That action will likely boost the dollar’s value in the short term, but its status as a reserve currency could become more unstable.
But what this means for the world is great uncertainty about U.S. trade policy, with disruption to global capital flows and exchange rates. Changes in U.S. policy and financial markets always have ripple effects on other countries’ economies and markets. The biggest irony is that this will prompt a flight to dollar assets, which are still considered the safest investments.
This will strengthen the dollar’s dominance even as President Trump weakens the institutional framework on which it is based.
The president-elect has talked about devaluing the dollar, but imposing tariffs on imports from major U.S. trading partners would increase the value of the dollar and make it harder for U.S. exporters to compete in global markets. That would have the opposite effect.
The new administration is likely to widen the U.S. budget deficit, and tax cuts and spending cuts are unlikely to match. This will depress U.S. national savings. Meanwhile, while China, Europe, Japan, and other countries are experiencing economic downturns, the United States remains one of the best investment destinations. The country’s recent productivity “boom” contrasts with the slow productivity growth of other major countries.
In other words, the imbalance between savings and investment, which is the root cause of America’s overall trade deficit, will only widen. Tariffs are important. But unless the United States insulates itself from the rest of the world, it is this imbalance that will ultimately determine the trade deficit.
President Trump’s running mate, J.D. Vance, has argued that the dollar’s dominance is having a negative impact on the U.S. economy. Such an advantage increases the demand for the currency and boosts its value compared to other currencies. This makes U.S. imports cheaper and makes it harder for U.S. companies to compete in foreign markets, both of which are undoubtedly hurting U.S. manufacturing. But Mr. Trump himself cannot accept the idea that the dollar will fall out of favor because of the actions of other countries. He recently threatened to punish BRICS countries with higher tariffs, not to mention, if they try to reduce their dependence on the dollar.
Still, it is precisely Trump’s actions that undermine key elements of America’s institutional framework. Washington’s system of checks and balances will be significantly weakened in the coming years, as the next president can win House confirmation. The rule of law will also take on a completely different meaning in the Trump era. The judicial system will clearly serve President Trump’s political purposes. Jay Powell will remain as Fed chairman for the time being, but the central bank’s independence is likely to come under attack if its policies conflict with President Trump’s wishes.
These elements of the U.S. institutional framework are essential to maintaining the confidence of domestic and foreign investors. Their impending disruption should hurt the dollar.
However, context and timing are everything. There are deep challenges at the heart of the international monetary system, and they will become even clearer in the Trump era. His capricious policies, and the instability they create in global financial markets, will send investors around the world (and even foreign central banks) scrambling for safety. They have nowhere else to turn but the dollar.
Despite calls for diversification, it has become clear that the rest of the world is not in a position to challenge the dollar’s dominance. The eurozone is plagued by economic weakness and political instability, China’s economy suffers from cyclical and structural weaknesses, and no other major currency is backed by a strong economy and financial system. Even if the Trump era was good for Bitcoin, its volatility means it is far from a safe asset.
So, in a final paradox, the generosity of other countries means that President Trump’s policies (and his currency tantrums) may strengthen the dollar in both the short and long term, rather than eroding its value or dominance. It means that there is a gender. This is true whether you believe in American exceptionalism or not. And the rest of the world has only themselves to blame.
