LONDON, Jan 16 (Reuters Breakingviews) – The U.S. dollar, long dominating global markets, is set to gain further strength due to the protectionist policies and fiscal strategies of President Donald Trump’s administration. The implications could be profound for markets, governments, and global trade.
After a three-year bull run, analysts initially predicted that 2025 would mark the dollar’s decline, fueled by a slowing U.S. economy and potential interest rate cuts. However, the dollar index, which tracks the currency’s performance against six major peers, has continued to climb, reaching its highest level since November 2022 on January 13.
Factors Driving the Dollar Surge
The dollar’s ascent may accelerate further if Trump fulfills his promises to impose widespread tariffs and implement an $8 trillion tax cut package. Tariffs would elevate the cost of imported goods, potentially keeping inflation high, while the tax cuts could spur economic growth and increase bond yields due to rising debt concerns. Together, these factors may prompt the Federal Reserve to halt rate cuts or even consider raising rates.
Although domestic and international challenges could temper these plans, markets appear unprepared for Trump’s bold economic agenda. Analysts, for instance, forecast a strengthening euro in 2025, and the International Monetary Fund predicts slower U.S. economic growth compared to the eurozone, UK, and Japan. Yet, a significant shift in U.S. policy could upend these expectations.
Global Ripple Effects
A stronger dollar often triggers global economic disruptions. Research from American University and the Bank for International Settlements reveals that rising dollar values shrink global trade by making it more expensive for non-U.S. companies to access the currency needed for transactions.
Diverging monetary policies further complicate matters. By December, eurozone rates are expected to lag behind U.S. rates by two percentage points, potentially weakening the euro and boosting European exports. However, this dynamic carries risks, especially for countries with large external deficits like Britain and New Zealand. For instance, the pound has fallen 2.4% against the dollar since January, reflecting investor unease and market volatility.
Asia’s Vulnerability
Asian economies, particularly those with significant trade surpluses with the U.S., could bear the brunt of a strong dollar. In China, the yuan recently hit a 16-month low against the greenback, prompting government interventions to stabilize the currency. Despite these efforts, the dollar has gained nearly 3% against the yuan over the past three months.
Trump’s Strong Dollar Conundrum
While both Trump and Vice President JD Vance have occasionally criticized the strong dollar, the administration’s economic priorities suggest otherwise. Even Treasury Secretary Scott Bessent previously described tariff threats as a negotiation tactic to pressure other countries into revaluing their currencies. Until policies shift, however, the dollar will continue to dominate global markets, making it a formidable challenge for economies worldwide.
