Analysis: The Impact of Trump-era Trade Policies on the Dollar's Reserve Status and Value
Stephen Miran argues that the dollar's status as the world's primary reserve currency imposes an undue burden on the United States and significantly contributes to its large current-account deficit. While some of President Trump's aides have reportedly sought to encourage a broader use of the dollar globally, the combination of policies pursued during his administration risks undermining the dollar's dominance.
If the dollar were to lose its reserve status, foreign holders might face a loss of safe assets. Alternative currencies such as the euro are not viable substitutes due to the fragmented nature of EU bond markets, and the Chinese renminbi remains limited by capital controls. Additionally, the dollar's value is supported by its function as a global hedge; approximately two-thirds of countries stabilize their currencies against the dollar to guard against external economic shocks.
U.S. debt levels stand near 120% of GDP and are largely financed through Treasury securities. The dollar’s reserve status has helped maintain low interest rates on this debt, allowing a relatively higher return on U.S. assets compared to foreign investors. However, the dollar’s share of global foreign-exchange reserves has declined from about 74% in the early 2000s to around 58% today, and the interest-rate advantage of U.S. Treasuries has diminished.
Trade tariffs imposed under the Trump administration could weaken the dollar's role as an insurance mechanism by weakening the link between the dollar and traded goods prices. This shift may motivate some countries to either peg their currency to alternatives or diversify away from holding dollars. Tariffs have already pushed U.S. interest rates higher by roughly 0.5 percentage points and affected some developing countries' economic conditions.
