OPINION:
In recent weeks, the dollar has fallen against most other currencies, but President Trump appears little disturbed.
Since Inauguration Day, the dollar’s trade-weighted value has slipped 8%, and it has declined 1.3% this year. This defies economic fundamentals.
Since 2016, the U.S. economy has grown 2.5% a year. In 2026, it is expected to continue outperforming other advanced industrialized economies.
A currency should rise when a government imposes tariffs by reducing imports and thereby curtailing its supply in foreign exchange markets.
Since the 1985 Plaza Accord, when the advanced industrialized countries abandoned the Bretton Woods system (which required other countries to maintain fixed exchange rates for their currencies against the dollar), supply and demand in foreign exchange markets that enable international trade and investment have determined their values.
Despite all the hand-wringing, the dollar still stands at the center of the system. The share of international transactions going through the dollar is 89%.
The dollar’s share of foreign central bank currency reserves has slipped to just below 58% as the system accommodates China’s growing share of global trade and prominence in manufacturing, but the same is true for other major currencies.
The reasons are simple.
The United States, through a combination of the U.S.-controlled SWIFT messaging system in Brussels and robust currency trading services provided by U.S. banks, provides a clean and efficient method for exchanging one currency for another.
Despite having a single currency, Visa and Mastercard hold a 90% market share for payment cards in Europe.
That makes the dollar a convenient place to invest, a cushion abroad for individual and institutional investors against domestic inflation and instability. U.S. stock markets offer the widest array of choices for equity investors.
As international businesses must access dollars to execute cross-border payments, corporate treasuries hold dollars and U.S. Treasury securities. These make a ready market for U.S. government and corporate debt.
Treasury Secretary Scott Bessent asserted that the U.S. still has a strong-dollar policy after Mr. Trump’s provocative comments ignited a frenzy of speculation that the president may want a debasement strategy (namely, drive up inflation to make the interest payments on the national debt less of a burden on the federal budget).
Other than Social Security outlays, interest payments now exceed all major categories of federal nonmilitary spending and are approximately equal to spending for national defense.
However, a weaker dollar does not play well with voters. It makes foreign travel more expensive and drives up inflation. Neither serves Mr. Trump’s interests well, and I suggest his recent comments were more a way to deflect criticism of his disruptive policies than a desire for a weaker currency.
A one-time downward adjustment in the value of the dollar against other currencies might be a good thing.
The dollar, owing to the demand for U.S. bonds that its central status creates, has historically been overvalued.
Simply put, if we look at prices for comparable products in dollars in America and in foreign currencies, the U.S. dollar is overvalued, and that is not surprising.
A cheaper dollar would make U.S. manufacturing more competitive.
Even after its recent decline, the trade-weighted exchange rate of the dollar against other currencies is about where it was just before COVID-19 and well above its level just before the 2008 global financial crisis.
The dollar has held its status because U.S. economic policy has been well managed, and the Federal Reserve has had independence from political interference to ensure a sound currency.
Mr. Trump’s saber-rattling regarding Greenland has upset the Western alliance, but note, not U.S. stock and bond markets. In the end, he will settle for the logical outcome. This will include a continued U.S. military presence in Greenland, exclusion of Russian and Chinese commercial activities, and Europeans finally taking Arctic defense against Russian incursions seriously.
A strong, enduring stock market indicates that investors recognize the fundamental soundness of the U.S. economy, and that’s what they bet on when they hold U.S. fixed-income investments such as Treasurys. They likely recognize that the next American president will be more temperate and less disruptive.
Mr. Trump has challenged the dollar’s stability with his frequent attacks on Fed Chairman Jerome Powell and his efforts to unseat Fed Governor Lisa Cook. Mr. Powell has failed to move Fed policy, and the Supreme Court will likely side with Ms. Cook.
The nomination of Kevin Warsh as Fed chairman (rather than a White House insider such as Kevin Hassett) indicates that Mr. Trump is feeling the pressure from the Senate to respect Fed independence.
Mr. Warsh believes Fed governance should be reviewed, and the ensuing Kabuki dance should satisfy Mr. Trump.
Markets are expecting two rate cuts this year, and barring a significant change in economic conditions, Mr. Warsh will deliver just that.
Effectively, there will be no change in policy by replacing Mr. Powell with Mr. Warsh.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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