Trump wants a drop in the USD value of at least 30%. This is the last of at least three monetary policies, that will shape 2025. See previous posts for the others, all of which can have short- and especially long-term impacts on the financial system.
Trump wants a 30% Drop in the USD value, at least
During the campaign, Trump repeatedly argued that U.S. industrial exports are hindered by an overly strong USD. According to Robert Lighthizer, the U.S. Trade Representative during Trump’s first term, the USD was overvalued by more than 30% at the time. That figure may be even higher today, as the USD has largely appreciated since the campaign.
Forcing the USD Lower Could However Backfire ...
According to Robert Mundell and Marcus Fleming’s “impossible trinity” theory, it is impossible to control a currency’s exchange rate while maintaining independent monetary policy and free capital flows. Free capital flows are essential for a currency to remain attractive as a global reserve.
... as Undermining the USD’s Role as a Reserve Currency ...
The USD's status as the world’s leading reserve currency is vital to U.S. geopolitical influence. Financially, this status translates into interest-free currency loans and a steady demand for U.S. Treasuries. It also diminishes the impact of the U.S. trade deficit, as the country can always meet its obligations by increasing its money supply.
… og dermed udvandes det “exorbitante privilegium”
Trump is keenly aware of the USD’s “exorbitant privilege” and repeatedly demonstrated during his campaign that he is prepared to defend this position by any means necessary. Ahead of the BRICS+ summit in Kazan this past October, Trump declared on X (formerly Twitter) that he considered any attempt to establish a BRICS currency as “treason.” He threatened to impose a 100% punitive tariff on goods from countries that voted in favor of a BRICS currency.
Although the BRICS currency initiative is currently on hold, as confirmed by South Africa’s foreign ministry, this likely stems from the diverging geopolitical interests of the member statesrather than Trump’s threats alone.
Market Mechanisms Will Work Against Trump’s Plan ...
Exchange rates are determined by supply and demand. Efforts to increase a currency’s share of global reserves or to issue high-yield bonds relative to other currencies naturally boost long-term demand for that currency. Consequently, rising fiscal deficits increase the risk of upward pressure on the USD, running counter to Trump’s intentions.
... and Achieving a Lower USD thus Requires Cooperation from Other Central Banks
Trump has proposed a new Plaza Accord to address this challenge.
The original Plaza Accord took place in September 1985, when G5 nations (the U.S., Japan, West Germany, France, and the U.K.) agreed to collectively weaken the USD through direct currency interventions.
This was in response to the dollar’s strength, fueled by high interest rates and expansionary fiscal policy under the Reagan administration. The accord successfully devalued the USD, with its value against the yen dropping nearly 50%.
However, this devaluation is now considered a key trigger for Japan’s subsequent deflationary spiral, exacerbated by domestic policy missteps.
The World Has Changed Since 1985 ...
It is doubtful that Trump’s plan would succeed as the Plaza Accord did, for several reasons:
- Globalization and Specialization: The global economy has become more integrated and specialized. Outside of major exports like soybeans, most U.S. products are highly specialized, making them less substitutable and less affected by currency fluctuations.
- Complex Supply Chains: Global trade routes are more intricate and resilient, making trade wars harder to implement effectively.
- New Dominant Players: Global trade is now led by countries like China, the Eurozone, Japan, Canada, South Korea, and India. Emerging economies such as Vietnam and Malaysia also play critical roles. Many of these nations would be reluctant to jeopardize their growth by cutting exports to the U.S., which remains a key trading partner.
... And a New Plaza Accord Would thus Be Far More Complex Today
To be effective, a new Plaza Accord would need to involve over 10 countries, including not just the Eurozone and Japan but also China, India, Indonesia, and others. Convincing these nations to participate would require exceptional diplomatic skill. For instance, China is already teetering on the edge of deflation, which it refers to as the “Japanese trap.”.
If markets remain free, such an agreement could also prompt central banks to reduce their reliance on the USD as a reserve currency. While this could weaken the dollar in the short term, it would undermine U.S. geopolitical power over the long term.
Currency risk directly influences interest rates, as they reflect the market’s risk premium for debt repayment over time.
Will Trump be willing to risk the USD’s reserve currency status while the U.S. is already grappling with a massive and growing fiscal deficit?
Click here for the first blog post in the sequence on central bank themes for 2025 and click here for the second blog post in the sequence.