US Dollar's Plummet: A Consequence of Trump-Era Economic Policies

The US dollar has experienced its most significant decline in the first half of the year since 1973, primarily driven by President Donald Trump's economic policies, which are prompting global investors to sell dollar-denominated assets and eroding the currency's traditional "safe haven" status. Trump's fluctuating tariff policies and statements that cast doubt on the Federal Reserve's independence have diminished the dollar's appeal as a secure investment. Economists are also concerned about his "Big and Beautiful Law," a substantial tax initiative projected to add trillions to the US public debt over the next decade. This has led to investor anxiety regarding the government's long-term solvency, triggering a wave of capital withdrawal from the US bond market. Concurrently, global gold prices have reached record highs, largely due to central bank purchases, reflecting unease about holding dollar-denominated assets.

The US dollar has long been central to the global financial and trade systems. Since the 1980s, many Gulf countries have pegged their currencies to the dollar, and its influence persists today. Despite the US accounting for only about a quarter of global GDP, the Atlantic Council reported that 54% of global exports in 2023 were denominated in USD. In the financial sector, approximately 60% of global bank deposits and nearly 70% of international bonds are dollar-denominated. Furthermore, the International Monetary Fund (IMF) indicates that 57% of global foreign exchange reserves are held in USD. However, this dominant position relies on confidence in the health of the US economy, the depth of its financial markets, and legal stability—factors that have been destabilized by Trump's policies. Karsten Junius, chief economist at J Safra Sarasin bank, noted that "Investors are starting to realize that they are too dependent on US assets." Apollo Asset Management data shows foreign investors hold substantial amounts in US stocks ($19 trillion), government bonds ($7 trillion), and corporate bonds ($5 trillion). If the current divestment trend continues, downward pressure on the dollar is expected to persist. Junius asserted, "The US is no longer the attractive investment destination it used to be... US assets are not as safe as they used to be."

Some officials within the Trump administration believe that the costs of maintaining the dollar's status as the world's reserve currency outweigh its benefits, as it makes US exports more expensive. Stephen Miran, chairman of Trump’s Council of Economic Advisers, stated that the dollar's high value "places an unfair burden on US businesses and workers, making our products and labor less competitive in international markets." He views the dollar's overvaluation as a factor in the decline of US competitiveness, with tariffs serving as a response. Theoretically, a weaker dollar makes US goods cheaper, boosting exports and reducing the trade deficit. However, the actual positive effects are unclear due to persistent trade tensions, which increase costs and uncertainty in supply chains. Against this backdrop, the Trump administration is pushing the "Big and the Beautiful Act," an ambitious fiscal plan that the Congressional Budget Office (CBO) projects will add $3.3 trillion to federal debt by 2034. This would further increase the public debt-to-GDP ratio (currently 124%), while the budget deficit is expected to widen from 6.4% of GDP in 2024 to 6.9%. Meanwhile, efforts by the Elon Musk-led Department of Government Efficiency to cut spending have yet to yield tangible results. This undisciplined fiscal policy, combined with uncertainty in trade and monetary policy, led Moody’s to downgrade the US’s credit rating to junk in May. Additionally, market expectations for the Federal Reserve to cut interest rates 2-3 times by year-end, as advocated by Trump, have further exacerbated downward pressure on the dollar.

The dollar's weakening since the beginning of Trump’s second term has defied expectations that the trade war would inflict more damage on other economies and boost US inflation, which would typically strengthen the dollar. Instead, the euro has rallied 13%, surpassing $1.17, driven by concerns over US growth prospects. Safe-haven assets like German and French government bonds have also seen strong demand. For US investors, a weaker dollar has created opportunities in foreign stocks; the Stoxx 600 index, representing European stocks, has gained approximately 15% since early 2025, translating to a real return of up to 23% when converted into US dollars. Simultaneously, a weaker dollar is benefiting developing countries. Nations with significant foreign currency debt, such as Ghana, Pakistan, and Zambia, are enjoying lower debt servicing costs. Commodity exporters, including Indonesia, Nigeria, and Chile, are also profiting from rising prices for oil, metals, and agricultural products, which are typically priced in dollars. Despite these shifts, Karsten Junius believes there are currently no serious risks to the dollar’s status as a global reserve currency. However, he cautioned, "That does not mean the dollar will not continue to weaken – in fact, we expect the downward trend to continue until the end of the year."