The U.S. dollar faces its most significant decline since 2022, not merely due to a slightly disappointing CPI report, but due to the erosion of its global dominance. The Trump administration’s reversal of some harsh ‘reciprocal’ tariffs leaves a lingering 10% rate globally and a staggering 145% on China, resembling an effective embargo on trade.
A 10% tariff implies reduced sales to America, resulting in fewer dollars flowing back to other countries. Milton Friedman suggested that America’s best trade strategy would be to eliminate barriers and invite global goods, emphasising that foreign sellers will always return their earnings to the U.S. market.
For years, this cycle has strengthened the dollar, with China buying U.S. Treasuries and Japan being a major investor in American markets. However, the current administration seems to believe it can alter these economic fundamentals. Recent congressional actions indicate a reckless disregard for deficits, considering a GOP bill that could inflate the deficit to $3 trillion by decade’s end.
Moreover, the U.S. appears to be shifting toward a mercantilist approach, with tariffs cemented at a floor of 10%. This raises concerns, particularly as the timeline for returning manufacturing to the States could lead to an economic downturn due to the uncompetitive nature of U.S. workers’ wages and the low unemployment.
Globalisation has fostered persistent disinflation in goods, contributing to low borrowing rates. Reversing this trend risks triggering inflation in goods and soaring borrowing rates—an unattractive scenario for investors. The market thus signals a resounding message: the current policy mix may yield slow growth, high inflation, and reduced productivity—all worrying prospects.
The U.S. dollar is experiencing a significant decline, rooted in tariff policies and a potential reconsideration of economic fundamentals by the White House. After a recent congressional bill that could inflate the deficit, the market is concerned about a shift toward mercantilism. This may lead to inflation in goods and high borrowing rates, creating an unappealing environment for investment and economic growth.
In conclusion, the American economy is at a crossroads where its fiscal policies and tariff strategies threaten to dismantle the stronghold of the U.S. dollar. With a potential shift towards mercantilism and a disregard for increasing deficits, the future of U.S. economic stability looks precarious. The longstanding cycle of dollar recirculation could unravel, leading to inflationary pressures that deter investment and challenge growth in a seemingly fragile market.
Original Source: www.forexlive.com
