Trump Smash Dollar? An Update
Last July, I argued in a Substack post that a Trump victory could lead to a much lower U.S. dollar vs. foreign currencies. After he did win, the dollar initially moved not lower but higher. Although everyone else and all the facts had proved me wrong, I remained sure I was right — qualifying me to be a university professor, as someone said.
Now, well into Trump II, I seem a little right, as the DXY dollar index is below its level on Election Day. Gold is up 20% and commodities that might be weaker, like oil as OPEC+ has increased production, or copper on recession fears, have held their value in dollar terms.
While I’m not a Nobel Prize economist like great Substacker Paul Krugman (or an economist at all), unlike his, all my posts are free.1 I’ll now try to unpack the current dollar situation, with the caveat that you get what you pay for.
Exchange Rates and the Tariffs
Normally, exchange rates are determined by factors including inflation and interest rates, economic growth, and political stability. During the Biden Administration, the U.S. scored well relative to the world on all these measures and the dollar remained highly valued and many would argue overvalued.
When Trump won in 2024, the dollar spiked, anticipating pro-growth policies that would expand on Biden’s, as well as some tariffs, which were thought to be dollar-positive. In my 2024 post, I only briefly touched on the tariffs, saying that anyway I didn’t think Trump would be able to figure out how to impose them without risking a global recession. Clearly I underestimated his determination to at least try out his beautiful plan, whatever the consequences.
The reason U.S. tariffs were expected to push up the dollar is that as imports decline Americans need less foreign currency, and a scarcity of dollars is anticipated as fewer of them will be exchanged for foreign goods. The Trump tariffs were, however, at first implemented so chaotically that they sparked a selloff in U.S. assets that overwhelmed the trade effect. And their magnitude (145% initially on China) and forecasted impact on supply chains dramatically raised the risks of a U.S. recession and inflation, two of the key exchange rate determinants.
So where do we go from here? No one can predict the near-term direction of the dollar, but if we look at the big picture we can make some medium-range guesses.
The Dollar and Republicans
On the campaign trail in 2024, Trump broke with decades of presidential tradition by explicitly calling for a weaker dollar. His running mate JD Vance at a hearing even “Senatorsplained” the relationship between the strong dollar and trade deficits to Fed Chair Jerome Powell, who then gave him a short course on the advantages and challenges of a reserve currency.
As president, Trump has changed his tune, knowing that the Treasury needs a stable dollar to be able to borrow at reasonable rates, which is critical to CBO scoring of the budget that will extend his 2017 tax cuts. (To understand anything economic Trump does, you should view it through the lens of the tax cuts, besides how it looks to his base.) Trump and Treasury Secretary Scott Bessent’s strong dollar talk is traditional, but whatever they’ve said, under the last three Republican presidents the DXY fell: 10.5% under George H.W. Bush, 22% under George W. Bush, and 10.5% under Trump I.
While no one can say exactly why this is, researchers at the University of Texas posit that while Republicans espouse fiscal conservatism, the Democrats actually practice it.2 We had tax cuts and exploding deficits under Bush II, followed by relatively responsible budgets under Obama, followed by tax cuts under Trump I. Biden’s big budgets were impacted by the Covid stimulus, and he did at least resist demands from his party’s progressive wing for even more spending.3
Another, cynical explanation of my own is that the Republican donor class includes many red state exporters of commodities like oil, gas, and agriculture that benefit from a weak dollar. Meanwhile, Democratic fundraising is dominated by finance and entertainment executives who would likely prefer a strong dollar. Trump, as a red state advocate, has always been far more focused on the trade deficit than, say, Biden or Obama. He has started his second term by trying to reduce it through tariffs, but if that doesn’t work he could return to the tried-and-true of a weaker dollar.4
The Reserve Currency
I predicted in last July’s post that Trump, a lifelong devotee of low interest rates, would pressure the Fed to cut them. Trump did this in record time, pouring gasoline on the April 2025 “Sell America” fire. I also predicted that if the dollar did weaken, global investors, heavily overweight U.S. stocks after a long bull market, would reallocate some exposure overseas.5 Check: year-to-date, international equities have outperformed the U.S. by around 15%.
Meanwhile, regulations are being changed and laws passed to benefit the cryptocurrency “industry,” which was among Trump’s biggest campaign donors. As the hardest-liners would love to see the dollar replaced by Bitcoin or some other coin, the Trump Family’s taste for crypto in all its scamalicious flavors can’t help but make people worry about the Executive Branch’s commitment to the reserve currency status.
An alternate reserve currency is the Euro. When Secretary Bessent was recently asked about it as a competitor to the dollar, he snorted, “The Europeans don’t want a strong currency” in a contemptuous tone. If I were in the EU leadership, I’d like to see him eat his words. The EU is less impacted by tariffs than say, China, as it doesn’t depend as much on exports to the U.S. Its status as the world’s second-largest economy, with 450 million people, gives it the potential to replace much of U.S. exports with domestic consumption.
Moreover, much has changed for Europe since Trump’s return, including the wake-up call that it can no longer depend on the U.S. for military protection. The new German government under Chancellor Friedrich Merz has a EUR 1 trillion infrastructure and defense plan, sweeping aside national debt limits to approve it. This investment and region-wide military spending could kickstart the European economy, making the Euro more than just a “no vote” on the dollar.6
How Low Could it Go?
If the dollar does resume weakening, where could it go? In 2008, the DXY got below 75 vs. 101 today, leaving plenty of downside. Foreign currencies won’t all fare the same, especially under disparate tariff pressure. The Chinese renminbi may have a problem, but the all-time high in the Euro was 1.40/$ in 2008 vs. 1.11/$ today.7
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Ashour, Rakowski, Sarkar, (April 2019) U.S. Presidential Cycles and the Foreign Exchange Market
It’s more complicated than that, because the makeup of Congress under presidents of different parties also affects deficits and debt increases, the biggest ones being under a Republican president with a Democratic House. See Bump, Philip, “Which party had power when the Federal debt rose the most?”, Washington Post, Feb. 7 2023
Economists don’t all agree that a weaker dollar would fix the trade and current account deficits, either. For a more intelligent discussion of exchange rate forces than my own, see Sankaran, “Trump, Vance, and the Dollar,” https://substack.com/home/post/p-146686548
The U.S. stock market represents over 40% of world stock market capitalization, but only about 25% of world GDP (15%, adjusting for purchasing power parity). U.S. private wealth managers estimated to me last July that the non-dollar exposure of their clients ranged from 5-15%. Probably the last time this situation obtained was in the early 2000’s, after the 1990’s U.S. bull market. In the years that followed, international stocks outperformed the U.S., and emerging markets outperformed by a lot. This is unsurprising, as the highest correlation asset (negative) to the EM index is the dollar.
A currency trader once said to me, “You have to understand, no trader ever wrote ‘Buy Euros Today’ on his pad.” That could change, and soon.
I’m biased, as an emerging markets manager with a large chunk of my portfolios in stocks denominated in Euros and Euro-linked currencies — although 90% of my personal assets ex-my own funds are in dollar-denominated securities and U.S. real estate, like everyone else.