The Perils of a Falling Trump Dollar
He says he’s OK with a weaker currency. Voters may feel differently.
By The Editorial Board
Antonio Pisacreta/Zuma PressPresident Trump this week said he thinks a weaker dollar is “great,” but he should be careful what he wishes for.
Many politicians over the years have contemplated a weaker greenback as an economic miracle cure.
They often discover that a weak dollar is a liability.
Mr. Trump made his remark Tuesday amid dollar weakness that is contributing to instability in global foreign-exchange markets.
The WSJ Dollar Index, which compares the greenback to a basket of currencies, has fallen about 8% over the past year, and gold’s steady ascent, to above $5,300 per ounce this week, sends its own signal about dollar weakness.
The dollar-euro exchange rate is among the most important in the global economy, and the greenback has lost about 14% of its value relative to the euro over the past year.
Other currencies have fallen further.
The Japanese yen dropped to near ¥160 yen per dollar last week, a level not seen (with a brief exception in 2024) since the 1980s.
The Korean won has oscillated between a sharp appreciation in the first half of last year and then a deep depreciation in the second.
But a softening dollar remains the big story here, and now Mr. Trump says that’s A-OK with him.
How retro.
For decades, devaluationists held that a weaker currency boosts exports and employment while a strong currency can throttle an economy.
It’s been decades since this view enjoyed strong empirical support, if it ever did.
Today’s high-tech exports are less susceptible to this form of price competition.
For global consumers choosing among a Ford, a Volkswagen, a Honda or a Kia, price is one of many factors they consider alongside safety, comfort and the size of the touch screen.
Plenty of evidence suggests that exchange-rate swings produce at best very short-term shifts in economic activity—before domestic inflation and deflation offset the effects.
This should set off alarms for Mr. Trump, since a weak dollar risks inflation he can ill-afford before the November midterms.
Some economists in Mr. Trump’s orbit have updated old exchange-rate theories to comport with their protectionist instincts on trade.
The idea is that “too much” foreign financial investment into the U.S. overvalues the dollar, which kills exporting industries and creates America’s large trade deficit.
Here, too, evidence of actual harm is hard to spot.
This so-called problem exists only because so many foreigners are investing in American economic growth.
Worse, the so-called solution is to deter that investment, such as with a withholding tax on interest paid to foreign holders of Treasurys.
All of this is an argument for a strong or stable dollar policy.
Especially when you consider why other currencies may be behaving as they are.
The big risks are in Asia.
In Japan, a weaker yen appears to be a symptom of a broader economic and financial rebalancing underway as interest rates normalize, inflation picks up, economic green shoots appear, and Tokyo’s fiscal policies remain profligate.
Japan’s transition toward a more normal monetary policy is risky enough without political fights over the yen-dollar rate.
Credit Treasury Secretary Scott Bessent for understanding this and engaging in moral suasion with foreign-exchange traders last week to help Tokyo stabilize the yen.
Credit to him as well for saying Wednesday that the U.S. has always had a “strong dollar policy,” which countered Mr. Trump’s comments a day earlier.
The greenback rallied on the news.
China shows signs of the opposite risk.
Beijing is anxious to avert too much appreciation of the yuan.
American protectionists interpret this as a competitive devaluation, but Beijing’s bigger concern by far is that a rapid run-up in the yuan might accelerate a deflationary spiral that may already be forming in its heavily indebted economy.
The yuan exchange rate, which is weaker relative to the dollar than some estimates think it should be, is a sign of Beijing’s vulnerability rather than export savvy.
No one—not even Mr. Trump—should want to push the world’s second-largest economy into a depression if we can avoid it.
There are good reasons Washington traditionally reverts to a strong-dollar policy.
Mr. Trump likes being an economic iconoclast, but he breaks this particular tradition at his—and America’s—peril.
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