“The dollar is our currency, but your problem”. This famous line was delivered by John Connally, President Nixon’s charismatic Treasury Secretary, to the G10 in 1971.
At the time, Europe held large USD reserves and the move to deliberately deflate the USD held major repercussions for Europe. The resulting inflation and limited growth tainted European economic policy for the rest of the decade.
50 years on and history appears to be repeating—Donald Trump’s tariffs have laid waste to global markets. Growth figures and inflation figures are under the microscope again. But this time, global trade is more interconnected and sovereign debts are higher than ever.
So why is this happening? Is US trade the only driver behind the decisions being made?
The dollar has weakened by over 10% since Trump’s inauguration in January. While campaigning, the Trump administration made no secret of their desire for a weaker USD to encourage exports and boost domestic manufacturing.
Crucially though, the USD is also the global reserve currency—which means markets, commodities and most of global trade is priced in USD. Many countries subsequently hold vast reserves of dollars and USD denominated bonds. As developing economies have become larger, currency manipulation has become more prevalent, and in many circumstances, the movement of the dollar is outside the control of the Federal Reserve.
The desire for a weaker dollar is driven by trade, but also America’s standing in the world. A devaluation of the USD was largely dismissed on the campaign trail, but the recent decisions made by the Trump administration would suggest it is a central part of their four-year agenda.
“When I started this job, in 2007, the GBP USD was trading at 2.10, the 30-year average was over 1.65, and the USA was still the dominant superpower. The global crash in 2008 and the pandemic in 2020, were key moments of the 21st century where everything changed. Could Trump’s tariff board in the Rose Garden be next?”
Devan Hayles from Axion questions.
Who knows? But a weaker USD is something we should all be prepared for.
Source: Best Bits
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