President Donald Trump expressed his welcome for the recent decline of the dollar. However, a former Federal Reserve president stated that the extremely large amount of U.S. debt calls for greater stability of the currency.
Over the past year, the U.S. dollar index has dropped by 10%, and it has declined by 1.2% just this month. This follows Trump’s “Liberation Day” tariffs last spring, which shocked the global market. More recently, concerns regarding the ballooning debt, the independence of the central bank, and the rift with European allies have put pressure on the greenback.
“I think it’s great,” Trump said on Tuesday regarding the dollar’s drop. “Look at the business we’re conducting. The dollar is performing well.”
The currency later recovered somewhat after Treasury Secretary Scott Bessent re – affirmed that the U.S. adheres to a strong – dollar policy and denied rumors of an intervention to support the yen.
Former Dallas Fed President Robert Kaplan attributed the recent slump of the dollar to investors purchasing some tail – risk protection by hedging the currency. He also noted that the demand for U.S. stocks remains high, going against the fears of a “sell America” trade.
“Yes, it’s true that a weaker dollar promotes exports,” Kaplan said. “However, in the United States, we have $39 trillion in debt, which is on its way to over $40 trillion. And when you have that much debt, I believe the stability of the currency likely takes precedence over exports. So, I actually think the U.S. will want to see a stable dollar.”
According to the, the current U.S. debt stands at $38.57 trillion.
The U.S. has long benefited from the “exorbitant privilege” of the dollar being the world’s reserve currency. With the inherent demand for dollar – denominated assets such as Treasury bonds, the government can borrow money at lower interest rates than it otherwise could.
But Trump’s attempts to disrupt the post – war global order have raised doubts about U.S. financial dominance and the sustainability of the national debt if that advantage vanishes.
Still, Kaplan pointed out the overall health of the American economy and the prospects for strong growth as continuous attractions for investors.
“I think there are many strengths in the United States in terms of innovation. We believe that it will be a very strong year for GDP growth, and there are many positive aspects,” he added.
Instead of fleeing from the U.S., markets are managing risk by seeking alternative safe havens like gold, Kaplan said.
Meanwhile, Robin Brooks, a senior fellow at the Brookings Institution, argued that a falling dollar won’t harm the demand for Treasury bonds. In fact, it could be beneficial, he said in a on Friday.
That’s because foreign central banks, especially those in export – oriented Asian economies, have an incentive to buy Treasuries to prevent their currencies from appreciating against the dollar.
“At the current moment, this means a falling Dollar should actually be favorable for the Treasury market,” Brooks wrote. “Dollar weakness stimulates new demand and—all other things being equal—puts downward pressure on longer – term yields.”