Recent fluctuations in the value of the dollar amidst a risk-averse financial market have raised concerns among investors. These anxieties stem from two pivotal factors: an article authored by one of Trump's top economic advisors advocating for measures to devalue the dollar, and the announcement of so-called "reciprocal" tariffs that heightened trade protectionism. This has led to scrutiny over the administration’s reform agenda and its potential impact on the dollar’s status as a reserve currency. Although there are fears about unorthodox policies affecting this role, current evidence suggests these concerns may be premature.
In late November, Stephen Miran, now head of the White House Council of Economic Advisers, published a report proposing several strategies to achieve multiple economic objectives simultaneously. Among these were higher tariffs, dollar devaluation, and even imposing charges on foreign-held Treasury bonds. The potential implementation of such measures alarmed investors, leading to questions about whether the recent dollar depreciation signaled a shift towards more unconventional approaches.
However, further analysis indicates that these concerns might not fully justify the observed currency movements. The dollar has returned to levels consistent with its historical relationship with other assets, particularly its correlation with real interest rate spreads against major trading partners. For instance, since January, when sentiment around Trump's policies shifted, the explanatory power of real rates for exchange rate changes reasserted itself.
This narrative change appears tied less to Miran's proposals and more to evolving perceptions of Trump's broader economic impact. Evidence shows that initial dollar appreciation began before Miran's report was released, moving contrary to its recommendations. Thus, recent trends seem driven primarily by shifting market narratives rather than specific policy suggestions.
Focusing specifically on euro-dollar dynamics reinforces this conclusion. Since October, the dollar initially diverged from predicted levels based on US-Eurozone real rate spreads but has since corrected rapidly following announcements like increased German public spending and Trump’s “Liberation Day.”
Despite heightened sensitivity to potential unorthodox policies, the dollar retains its structural strengths within the international financial system. While mere suggestions of altering its central role cause market unease, actual changes would require far more substantial actions. As evident from global data, the dollar remains dominant across reserves, foreign exchange trading, global payments, and debt issuance. It will take more than speculative discussions to alter this established reality.