Introduction
President Donald Trump’s administration has been actively undermining confidence in the US dollar, which serves as a global currency. This article explores the implications of such actions and examines the perspectives of economists surrounding Trump, including those who advocate for a weaker dollar.
Trump’s Stance on the Global Dollar
Trump believes that a strong dollar benefits countries with robust economies, like the United States. However, his advisors express concerns that a powerful dollar could make US industries less competitive, leading to job losses. This dichotomy raises the question: who is right?
Economists’ Perspectives
Stephen Miran, the head of Trump’s Council of Economic Advisors, argues that the global use of the US dollar has caused persistent exchange rate distortions and contributed to unsustainable trade deficits due to unfair trade barriers imposed by other countries.
Michael Pettis, an influential figure outside the government, recently wrote in the Financial Times that “the United States would be better off without the global dollar.” He believes that a strong dollar makes US industries less competitive, resulting in job losses.
The Advantages of a Global Dollar
When people around the world use dollars for savings and investments, it creates what former French finance minister Valéry Giscard d’Estaing described as an “exorbitant privilege” for the United States—not a cost, as Miran and Pettis suggest.
The US benefits from “seigniorage” on a global scale, as people worldwide desire holding greenbacks for savings and investments. The Federal Reserve estimates that foreigners hold over a trillion dollars in cash, accounting for 45% of the total money supply.
This low-cost funding source for the US is further bolstered by foreign investors’ willingness to hold US Treasury bonds, even when their interest rates are lower than similar-risk and -term bonds issued by other governments.
Low-Cost Financing for the US
An American traveling abroad paying for a hotel room in dollars contributes to low-cost financing for the US. If prices rise in the US during that year, it equates to a negative-interest loan received by Americans from the rest of the world.
Moreover, US Treasury bonds are widely used as collateral in global financial transactions. This results in foreign investors accepting lower-yielding US bonds compared to those of similar risk and term from other governments, providing the US with low-cost financing.
By the end of 2024, nearly $8.6 trillion of US federal debt was held by foreigners. If the yield advantage results in a 0.5% lower interest rate for US debt, Americans save $43 billion annually. Additionally, if this effect lowers the Treasury bond rate below the economic growth rate, the US effectively receives free money by issuing bonds without ever repaying them.
Ignoring the Benefits
Miran acknowledged that “demand for dollars has kept interest rates low, which enables us to borrow at favorable rates.” However, he disregarded this crucial fact in the remainder of his speech. He also failed to mention another advantage of the global dollar: when the US faces difficulties, the value of the dollar declines, reducing the burden of dollar-denominated debts owed to the rest of the world. Countries that borrow in their local currency must pay higher interest rates to compensate for devaluation risks, unlike the US.
Global Benefits of a Global Dollar
A global dollar benefits people worldwide by providing secure assets denominated in dollars for savings and investments. Currently, no other economy can offer this service.
Europe is the obvious alternative, but its capital market is more fragmented than that of the US. China has a massive economy, but its authoritarian political system and extensive capital controls diminish enthusiasm for holding renminbi-denominated assets.
Trump’s Policies and Their Global Impact
Trump’s policies, such as imposing tariffs that violate international agreements and speculating about invading allied nations like Canada and Denmark to seize Greenland, have made the US resemble countries with weak currencies and high inflation.
The global reaction to Trump’s “Liberation Day” tariffs was clear: the dollar fell nearly 7% against the euro, and the yield on 10-year US Treasury bonds rose almost half a percentage point. Emerging and developing countries’ currencies also plummeted due to higher tariffs and a potential global economic slowdown.
Key Questions and Answers
- Q: Does harming the global dollar benefit the US? A: No, a weakened global dollar would negatively impact many people worldwide.
- Q: What makes the US dollar a global currency? A: Historically, the reliability of US policies and institutions has surpassed most countries.
- Q: How do Trump’s policies affect the global dollar? A: Trump’s actions, such as imposing tariffs and disregarding international agreements, have led to a decline in the dollar’s value and increased global economic uncertainty.
Copyright: Project Syndicate, 1995 – 2025
www.project-syndicate.org
The Author: Andrés Velasco, former Chilean Minister of Finance and Dean of the School of Public Policy at the London School of Economics and Political Science.
Translation: Ana María Velasco
