Currency depreciation linked to Trump's tariff policies: Understanding the implications for ordinary consumers.
Revamped Report:
The almighty greenback, the dollar, keeps tumbling and losing ground in the United States.
Donald Trump's stringent trade tactics are causing jitters and negatively impacting financial markets.
A weak dollar could invigorate exports while dampening imports due to tariffs, impacting the trade deficit positively.
Since Trump's inauguration as US President in early 2017, the dollar's trajectory has been uniformly downhill. During the initial three months of his tenure, the American currency shed approximately ten percent of its value against the euro. Presently, the dollar is as fragile against the euro as it has been in well over three years.
A weak dollar hoists consumers. It makes goods traded globally in dollars cheaper, slowing down inflation in Germany and Europe overall. Yet, a weak dollar can also bring about negative consequences for the global economy and potentially revolutionize the global financial system. Here's a rundown of crucial questions and their answers.
Why is the dollar sliding?
One significant factor is Trump's disruptive trade strategies, which instill much uncertainty and put stress on the dollar's trajectory. Furthermore, sharp critiques of US Federal Reserve Chair Jerome Powell are rife. On his Truth Social platform, Trump labeled the Fed chair a "flop" and voiced wishes for his removal.
Although Trump has since stepped back from his criticism, experts are far from convinced. Bernd Weidensteiner, an analyst from Commerzbank, says, "We believe uncertainty about the independence of the US Federal Reserve will endure." Trump will keep tightening the screws on the Fed if it doesn't lower interest rates promptly. The jitters in the markets are also evident in the fact that numerous investors are still securing themselves against additional dollar depreciation.
What makes the dollar the "global reserve currency"?
The US dollar reigns unrivaled as the global reserve currency. It meets all necessary requirements. Central banks mostly stash their reserves in dollars. Most commodities are traded in dollars, and most currency transactions happen in the US currency. Moreover, the USA delivers the world's largest financial market, accessible to all investors.
Especially significant is the extensive market for US Treasury securities, where virtually unlimited funds can be invested. Notably, China and Japan have invested substantial sums in American bonds in recent years, placing them among the largest foreign creditors of the USA.
What does a weak dollar signify for consumers?
One of the most significant benefits is in energy costs. The dollar's decline makes commodities traded in the US currency cheaper on the global market. Recently, ECB President Christine Lagarde has contended that the consequences of US trade policies could even curb inflation in the eurozone.
Moreover, a weak dollar offers positive effects on the travel budgets of tourists in the USA. Prices for hotels, restaurant visits, or car rentals remain stationary in the states, but tourists from the eurozone get more bang for their buck. However, recent data indicates that this effect only marginally impacts holiday destination choices. Instead, US government policy seems to impact tourism more profoundly. Data from the latest US National Travel and Tourism Office indicates a 28% decrease in German tourists in the USA in March.
Has the dollar's status as a haven at stock exchanges been undermined for decades?
(No need for translation since the question is already in English)
Markets responded reflexively to international crises in a predictable pattern: The US dollar's exchange rate surged, and yields on US government bonds plummeted due to increased demand. However, these established patterns were disrupted by the mercurial trade strategies of the new US administration. Trump's aggressive trade policies created doubt about the safety of the US financial market. US bonds suddenly came under pressure and were no longer considered safe havens. However, the US is likely to go to great lengths to maintain the status of the dollar as the world's leading currency. Only then can they maintain a favorable interest rate profile.
Are there substitutes for the dollar?
The euro is not yet a viable alternative, despite gaining from the dollar's weakness recently. The implementation of the planned capital market union in the EU could bring progress. However, the Eurozone is still far from the issuance of joint government bonds. Experts believe it is possible that there could be multiple leading currencies, including the Chinese renminbi, in the distant future if China continues to liberalize its economy. Trump's policies might speed up this process.
Is Trump intentionally weakening the dollar to strengthen US exports?
Donald Trump has repeatedly lamented that the US is treated unfairly in international trade. While successful exporting nations like Germany boast a massive trade surplus, the US has a chronic trade deficit. A decrease in the US currency's exchange rate makes American goods cheaper abroad, which could bolster exports. At the same time, imports into the US are being choked by aggressive trade policies. In this way, Trump attempts to reduce the trade deficit. However, many experts deem this strategy ineffectual.
- Bernd Weidensteiner, an analyst from Commerzbank, believes that uncertainty about the independence of the US Federal Reserve will persist due to Donald Trump's criticism of Federal Reserve Chair Jerome Powell.
- A weak dollar, as a result of Trump's trade tactics and critiques of the US Federal Reserve, could potentially revolutionize the global financial system.
- A weak dollar makes commodities traded in the US currency cheaper on the global market, which could lead to decreased energy costs for consumers, according to ECB President Christine Lagarde.
- Trump's policies may inadvertently speed up the process of multiple leading currencies emerging, such as the Chinese renminbi, if China continues to liberalize its economy.
