The consensus on a strong dollar may be too complacent

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The writer is the author of “Through Two Hundred Years of Confusion. “The Amazing History of the British Economy” is the author of the book.

One common theme shared by banks and asset managers ahead of 2025 was a near-consensus view that the dollar will strengthen further over the next 12 months.

Donald Trump himself, along with many of his top trade policy advisers, has long argued that a strong dollar has made American exports more expensive, encouraged imports and cost American manufacturing jobs.Others appointed to key jobs, however, such as Scott Besant , who has been nominated for finance minister, have publicly taken a more traditional stance and supported a strong dollar.

Whatever the new administration wants, markets seem reasonably confident that the result will be a stronger dollar rather than a weaker one A key component of the Trump trade that captivated Wall Street last year is the assumption that the new president will follow through on all aspects of his agenda. favor markets while his broad party balks at anything they want less of.

Tax cuts and deregulation will boost profits and stock market returns, while the resulting higher deficits will be bad but not catastrophic for US Treasuries. The increase will not be enough to shock the stock market. will be enough to boost the dollar.The threat of higher tariffs, which will lead to fewer dollars leaving America, has added to the dollar’s luster since November.

The consensus view, then, is that the dollar will remain strong, even if the new president occasionally takes to social media to moan about it.However, there are at least three reasons to worry that this consensus is complacent.

Tariffs are the first. Economic theory suggests that in the short term, new tariffs may indeed lead to a strengthening of the currency. A trading partner’s currency that is subject to new restrictions often depreciates to offset, at least in part, the value of the tariffs. This was generally the case for China’s renminbi in 2018-19 : But in the long run, tariffs are associated with fewer imports and exports and a generally weaker economy Tariffs may give the dollar a short-term boost but weaken it in the medium to long term.

Second, it’s worth taking seriously the idea that when Trump says he wants a weaker dollar, he really means it. The threat of much higher tariffs on America’s major trading partners may simply be an opening act to try to draw those trading partners into a multilateral agreement to lower the value of the dollar.There can be little doubt that the author The art of the deal would not be happy to host a summit at Mar-a-Lago to preside over the negotiations.Of course, the mechanics of such a deal would be complicated by the 1985 Plaza Agreement, in which the finance ministers of the United States, Great Britain, West Germany, and Japan met to discuss international exchange rates. sometimes considered a model, but the global economy is a very different place these days. 40 years ago, the five participants accounted for about 45 percent of global GDP in purchasing power parity, compared to 25 percent between them today.

The other major threat to the value of the dollar can be found outside the traditional realm of economic policy. Work: by economists Barry EichengreenIn 2017, Arnaud Mehl and Livia Chitu studied the geopolitical foundations of international currency values. In general, countries hold a larger share of their reserves in the currency of the country that provides them with a security guarantee.This argument helps US allies maintain the value of the dollar and keep US borrowing costs lower than they would otherwise be. If those safety guarantees begin to dissolve, the dollar’s share of international reserves could begin to fall, providing further headwinds.

The dollar has rallied strongly since September, but much of the view behind those gains may be wishful thinking.