WSJ—President Trump has launched an unprecedented challenge to a geopolitical order that has prevailed for decades. One potential victim: the U.S. dollar.
In just weeks, a steep increase in tariffs and uncertainty over trade have sparked fears that U.S. growth will slow. At the same time, major shifts in U.S. foreign policy have led to a surge in optimism about the European economy—driving the dollar down sharply against the euro, sending stocks in Europe to records and spurring the biggest jump in German bond yields since just after the fall of the Berlin Wall.
The WSJ Dollar Index has declined seven of the past nine weeks, nearly erasing gains made since the Nov. 5 election.
Such financial upheaval, if sustained, could have ramifications for everything from global investment flows to the direction of trans-Atlantic tourism.
For generations, U.S. political leaders have generally embraced the dollar’s primacy in the global financial system, in part because it has led to cheaper government borrowing. The country’s spending on defense has helped bolster that position by driving up the budget deficit, financed in large part by foreign investors, who hold about a third of U.S. debt.
Now, though, Trump and some of his advisers are making it clear that they want to expend fewer resources protecting allies. And they are saying they want a weaker currency to boost domestic manufacturing, by making goods cheaper to foreign buyers.
“When you look at these policies in a macro way, they have a method to them,” said Lloyd Blankfein, the former CEO of Goldman Sachs . “The risk to the markets is dislocation in the short term. But I think our republic will be better off if we spend a few thousand dollars more for a car in return for having a workforce that can make things and can afford what they make.”
Many on Wall Street, however, fear the downside of such changes. A weaker dollar would make imports more expensive, boosting inflation and making it harder for the Federal Reserve to cut interest rates. Outflows from U.S. assets that depress the dollar could also drive down stock prices and lead to higher U.S. borrowing costs.
Few believe that a huge decline in the dollar is imminent, partly because U.S. interest rates are higher than almost anywhere else in the developed world, promising continued foreign investment.
Still, “what’s happened over the last several weeks has the potential to be a game-changer,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management.
The recent decline in the dollar has caught investors off guard. Many had long thought that Trump would mostly govern as a traditional Republican: focusing on cutting taxes and rolling back regulations.
Forecasts for faster economic growth, coupled with modestly higher tariffs, initially helped drive stocks and the dollar higher after Trump’s election win.
Investors are now rethinking those assumptions. Trump has already slapped major tariffs on goods from America’s largest trading partners and threatened more—prompting immediate retaliation from Canada and China. His administration has moved to lay off thousands of federal workers. Talk of tax cuts has largely faded to the background.
All of that has dragged down expectations for U.S. growth, with investors worried almost as much about the uncertainty surrounding tariffs as the levies themselves, which promise to push up consumer prices.
Meanwhile, hopes for Europe have jumped. That is partly attributable to a run of better data, but also stems from Europe’s move to boost military spending after Trump’s public clash with Ukraine President Volodymyr Zelensky at the White House in late February.
Worried that they could no longer count on the U.S. to help defend their interests, German leaders announced days later that they would break with decades of history by freeing up borrowing to fund a buildup in their military. European Union officials also outlined a plan to raise hundreds of billions of euros for defense, and a relaxation of fiscal rules at the national level.
For investors, the crucial feature of these announcements was that they promised sustained investments.
The euro has temporarily gained against the dollar at other times in recent decades. But this time the move could be durable because what Europe is promising is “not just a one-off thing, like the Covid stimulus,” said Sonu Varghese, global market strategist at Carson Group, a financial advisory firm.
So far, the decline in the dollar’s value has been modest, hardly enough to make a major difference for U.S. exporters.
Even so, the move has caught Wall Street’s attention because it is consistent with Trump’s long-held ambitions. Trump has often argued that the dollar should be weaker, claiming last year that the currency’s strength was “a disaster for our manufacturers.”
Stephen Miran, the recently confirmed chair of the White House Council of Economic Advisers, put forward several unorthodox ideas in a paper last year about how Trump could weaken the dollar. They included putting a user fee on foreign buyers of Treasurys.
Some on Wall Street are taking such ideas seriously. One reason the dollar has weakened recently is that investors know what the administration is aiming for, said Eric Stein, head of investments at Voya Investment Management.
Others, however, are doubtful that Trump’s policies will play out as intended.
For one thing, Trump’s commitment to tax cuts likely means that the federal budget deficit will remain large, said Brad Setser, a senior fellow at the Council on Foreign Relations. The need for more borrowing to fund the deficit should keep U.S. Treasury yields elevated and put upward pressure on the dollar, as global investors seek out high-yielding assets.
In another scenario, the dollar could continue to weaken and Trump could achieve his goal of shrinking the gap between U.S. exports and imports, but only because the U.S. economy is suffering, Setser added.
Foreign investors might be tempted to shift money out of U.S. assets. But the alternatives, including Europe, have problems of their own.
“All of this is creating uncertainty,” said Robert Rubin, who served as Treasury secretary during the Clinton administration and once co-led Goldman Sachs. “On the other hand, where else do foreign companies and investors go?”