Donald Trump’s history with the US dollar has always been intricate and, at times, contentious. During his first term, he openly advocated for a weaker dollar, breaking with longstanding norms of presidential decorum. This wasn’t surprising for Trump, who often redefined conventional expectations.
Back in 2019, European Central Bank (ECB) President Mario Draghi hinted at potential monetary stimulus. Trump’s response came swiftly via Twitter:
“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”
This was a clear deviation from traditional US dollar policy and signaled Trump’s willingness to challenge foreign economic maneuvers. Now, as he prepares for a second term, discussions about the dollar are back in the spotlight. Trump’s selection for Treasury Secretary, Scott Bessent, adds a new twist.
Bessent is attempting to project a narrative of market-driven policies. “If you have good economic policies, you’re naturally going to have a strong dollar,” he said recently. Yet Trump’s actions often override his administration’s rhetoric, leaving market participants cautious about taking these statements at face value.
The dollar seems to have its own agenda, climbing nearly 3% on the DXY dollar index since Trump’s re-election. This upward trajectory contrasts with Trump’s earlier preference for a weaker currency and is likely to strain trade relations with the eurozone and China, both of which are grappling with economic challenges.
The eurozone faces a precarious situation. The ECB has been aggressively cutting rates to stave off recession risks, with deposit rates potentially falling to 1.5% from 3%. Inflation in the region remains below the ECB’s 2% target, creating a fragile economic environment. A stronger dollar exacerbates the issue by making European exports less competitive, further widening the trade gap with the US.
China’s economy isn’t faring much better. Leaders are calling for additional fiscal and monetary stimulus as they navigate ongoing economic struggles. The renminbi—a frequent focus in US-China trade disputes—is likely to remain a key pressure point. Chinese authorities have historically weakened their currency by purchasing US dollars, and analysts predict this tactic could resurface, especially if Trump’s tariff-heavy policies make a comeback. This dynamic could lead to another round of economic brinkmanship.
Trump’s unpredictability adds further complexity. During his first term, he frequently criticized foreign stimulus measures, accusing them of undermining American trade interests. Should the dollar’s strength continue, he might revive such critiques, framing them as part of his broader effort to protect American workers.
Trump’s willingness to defy traditional norms raises questions about whether he might pursue a modern-day currency accord. In 1985, the Plaza Accord saw major economies agree to weaken the dollar to rebalance global trade. Could Trump orchestrate a “Mar-a-Lago Accord” to achieve similar objectives?
Such a deal would likely demand concessions from US trading partners in exchange for tariff relief. However, the complexity of currency negotiations poses a significant challenge. Exchange rates are not just numerical values but also reflect the broader economic health, trade balances, and monetary policies of nations. Coordinating these variables across multiple economies is akin to playing chess on several boards simultaneously.
Trump’s tendency to frame issues in win-or-lose terms complicates this already difficult task. Some analysts are warning of potential “currency wars” if Trump pushes too hard, which could lead to retaliation from trading partners and heightened volatility in global markets.
Despite these risks, financial markets seem to have priced in much of Trump’s potential impact on the dollar. The DXY index has surged 6% since late October, reflecting investor bets on his re-election and the anticipated economic policies of his second term. This momentum may limit the dollar’s further appreciation, at least for now.
However, if Trump renews his efforts to pressure foreign governments into weakening their currencies, market dynamics could shift dramatically. Social media-driven diplomacy could make a comeback, injecting uncertainty into already volatile financial markets.
Donald Trump’s second term is poised to bring renewed scrutiny to US dollar policy. Whether through direct intervention, trade negotiations, or unexpected Twitter announcements, his approach will likely challenge conventional wisdom. As the dollar strengthens and global economic dynamics evolve, Trump’s decisions could set the stage for a new era in currency diplomacy—or another round of market turbulence.
December 2024, Cryptoniteuae