As the US trade deficit hits historic lows, President Trump seeks to weaken the dollar to boost American industry and reduce the massive trade deficit. But will a weaker dollar bring back manufacturing jobs and reduce the deficit, or will it lead to inflation and rising unemployment?
The United States has a record trade deficit, with imports exceeding exports by $1.2 trillion in 2024. President Trump believes that a weaker dollar is necessary to boost American industry, bring back manufacturing jobs, and reduce the massive trade deficit.
However, experts are not convinced by this argument. A strong dollar makes it relatively cheap to buy other currencies, while a weak dollar means it’s more expensive. According to David Lubin, a senior research fellow at Chatham House, ‘it’s all about exchange rates.‘ When the dollar is strong, US imports rise because foreign goods become cheap relative to domestically produced goods, and US exports fall as they become more expensive.
Exchange rates determine the value of one country's currency in relation to another.
They are influenced by economic indicators, interest rates, and trade policies.
The foreign exchange market is a global marketplace where currencies are traded.
According to the Bank for International Settlements, the average daily trading volume in 2020 was over $6 trillion.
Exchange rates can fluctuate rapidly due to changes in supply and demand, making it essential for businesses and individuals to stay informed about currency fluctuations.
The Power of the President
While the president has some levers available to steer the dollar and the wider economy, getting the dollar exchange rate under control is wildly complicated and mostly out of their hands. The dollar’s value is determined by a huge global foreign-exchange market, not the president or the US government.
The US Federal Reserve can cut interest rates, but this decision is largely independent of the president’s wishes. Additionally, the Treasury could try to buy foreign currencies through its Exchange Stabilization Fund, but purchasing huge quantities would be challenging given the sheer size of today’s currency markets.
Options for Devaluation
Some experts suggest that Trump could weaken the dollar by making the country ‘less attractive as an investment destination.’ However, this is a ‘dangerous doubled edge sword and highly unpredictable,’ according to Lubin. Another option is for the US to convince or force other countries to sell their dollars for other currencies.
There is a precedent called the ‘Plaza Accord,’ which was signed in 1985 by the US, UK, Japan, West Germany, and France. This one-off agreement brought together these five biggest economies with Germany and Japan dependent on the US military for defense. A similar plan to weaken the US dollar has come up again known as the ‘Mar-a-Lago Accord,’ but experts believe that such an accord is unlikely due to resistance from policymakers and finance ministers, particularly China.
The Plaza Accord was a monetary agreement signed on September 22, 1985, by six major economies: the United States, Japan, West Germany, France, the United Kingdom, and Canada.
The accord aimed to stabilize international currency exchange rates and reduce trade imbalances.
It established a system of coordinated intervention in foreign exchange markets to maintain stable exchange rates.
The Plaza Accord played a significant role in ending the 1985 currency crisis by reducing the value of the US dollar.
Potential Consequences of a Weaker Dollar
A weaker US dollar can have many knock-on effects, including boosting commodity prices since they are mostly traded in dollars on international markets. However, Lubin believes that for US households, the main risks are inflation, rising prices, and rising unemployment. Abrahamian also notes that even if Trump manages to devalue the dollar, it may not actually boost American competitiveness, since prices are ‘not just driven by exchange rates, but by things like production costs, productivity, and quality.‘
