USD – Fatigue in the Long-Term Trend. Will the Depreciation Continue?

Understanding the economic policy of Donald Trump’s team requires a certain amount of magical thinking. The White House often tries to combine contradictory policies or expects a single measure to achieve several mutually exclusive goals. At the heart of this contradiction lies the dollar policy — the administration simultaneously wants to preserve its global dominance while some advisers believe that the dollar’s status as the main reserve currency is a burden for the U.S. and a key factor behind its large trade deficit.

Trump’s chief economic adviser, Steven Miran, argues that the large current account deficit is not caused by excessive imports but by the need to issue government bonds for foreign countries to hold as reserves. This creates a “permanent overvaluation of the dollar,” which prevents international trade from balancing.

The possibility of a dollar devaluation

Trump and his team could reduce the value of the dollar, either through deliberate policy or incompetence, and the impact on foreign markets would be significant. The old hopes of competition with the euro are hindered by fragmented European capital markets, while the Chinese yuan cannot take a leading role because of capital controls.

The dollar remains valuable not only as a financial safe haven. Around two-thirds of countries stabilize their currencies against the dollar to protect themselves from global economic shocks. In this way, the dollar’s value influences the price of traded goods and acts as insurance against economic instability.

The costs to the U.S. of undermining the dollar

Undermining the dollar would be costly for the United States. In the event of a devaluation, the country would lose its global influence and its main instrument of economic coercion, which allows it to restrict enemies’ access to the financial system. The dollar’s reserve currency status grants the U.S. an “extraordinary privilege,” enabling it to finance its massive public debt — 120% of GDP — at low interest rates while earning higher returns on foreign assets.

At the same time, Trump’s trade war could weaken the dollar’s insurance role. Restricting imports through tariffs reduces the dollar’s influence on commodity prices, which in turn lowers the incentive for countries to hold dollar-denominated assets.

Restoring the stability of the dollar

After the initial “Trump shock” in April, when the announcement of tariffs triggered a collapse in the dollar and the bond market, volatility has gradually calmed. Expectations for movements in the dollar’s exchange rate against the euro and the yen have fallen back to pre-election levels, and the dollar index has regained part of its losses.

This is due to several factors: the signing of trade agreements with major partners such as the EU and China, the better-than-expected performance of the economy despite the tariffs, and the nearing end of the rate-cutting cycle by major central banks. The dollar has once again begun responding to traditional economic determinants — primarily interest rate differentials between countries.

The dollar as a portfolio stabilizer

Some investors are once again viewing the dollar as a stabilizer for their portfolios, as it tends to strengthen during periods of global stress. In the first half of the year, its decline was an “anomaly” caused by political uncertainty. Now that economic and fiscal policies are more predictable, the dollar is regaining its position as a safe-haven currency for international investors.

Conclusion

Despite the contradictions and “magical thinking” in Trump’s economic policy, the dollar remains a stable and vital currency in the global financial market. The possibility of depreciation or the loss of its reserve status still exists, but for now, it is regaining its role as a global stabilizer, while the shocks caused by tariffs and political statements are easing. The real question is whether the United States can balance its trade objectives with maintaining the dollar’s dominant role — a challenge that will continue to shape international economic dynamics.