Economic disputes: The influence of a degrading dollar on Trump's administration - and Britain's economy
The slide of the US dollar has seemingly been the main event for financial markets this year. As the world's reserve currency, its impact is significant, given that numerous nations and investors hold it. However, under the Trump 2.0 presidency, the dollar has taken quite the nosedive. To put it in perspective, the dollar index, which measures its value against six major currencies, is down a whopping 9% in 2022 and is on track for its worst annual performance since 2017.
This downfall cannot be ignored as it coincides with a Trump-controlled White House. The reasons for this decline are similar to those experienced during his first term, yet the situation is far more economically volatile.
So, why is the dollar losing its footing? Investors are particularly anxious about the president's trade war, its implications for the US economy, and the impact his policies may have on the nation's public finances.
Prominent worries include the potential for a global economic recession due to trade war import duties, also known as tariffs. The fallout has caused a stir, making it challenging for the US central bank to consider interest rate cuts, a circumstance that typically supports a currency.
Recently, the spotlight has shifted towards the US budget deficit and total debt mountain due to controversial tax cut and spending hike plans by the president. Experts anticipate these initiatives will add around $2.4 trillion to the $36.2 trillion total for US government debt—a debt pile that has become increasingly costly to maintain.
This news might seem threatening to Trump's popularity, but poll data shows that, for the first time in two months, less than half of US citizens have a strong or somewhat negative opinion of the president's performance.
The weakening dollar will offset some of the additional tariff-related costs paid by importers, which should help limit the impact on consumers. On the flip side, Americans traveling abroad will find their dollars won't stretch as far. UK-based firms, with dollar earnings, will be affected negatively as the pound won't go as far when translated to dollars. Conversely, British tourists visiting the US can rejoice as the pound has surged more than 8% against the dollar year-to-date, making it a stronger contender.
As for the future, much depends on the course of the Trump trade war, which holds the key to dollar fortunes. Experts predict that, should the dollar's weakening help alleviate inflationary pressure, this could be a silver lining. For instance, the weakening dollar is believed to be contributing to lower oil costs since it is priced in dollars.
The Trump-controlled White House's trade war and controversial finance policies, such as tax cuts and spending hikes, are fueling investor anxiety about the US dollar's strength and its impact on the economy, public finances, and international business. The downward trend in the dollar's value has significant implications for businesses and economies that deal in dollars, as it affects the costs of imports, the purchasing power of travelers, and the value of earnings for foreign firms.
