Are Trump trade policies undermining the US dollar?

The United States may be facing a crisis of confidence in the US dollar that could have serious economic consequences including raising the price of imported goods and increasing borrowing costs to US lenders.

This could happen if foreigners buy less US bonds and stock and take their investments to other countries.

In 2025, the Bloomberg Dollar Spot Index reached its highest level of 109.956 USD on January 13th, which was a week before President Trump took office. Subsequently the dollar has declined to 104.384 USD. as of March 26^th.

On March 25th, Bloomberg reported that the US dollar is having its worst month in over a year due to President Donald Trump's tariff policies threatening U.S. economic expansion: “The dollar is headed for its worst month in over a year as US economic expansion is threatened by President Donald Trump’s tariff policies. The Bloomberg Dollar Spot Index is down over 4% from its intraday peak on Feb. 3 as false starts for tariffs have traders betting against the dollar. It’s a major about-face from earlier this year as investors initially thought the Trump administration’s plans would support the world’s reserve currency. “We’ve gotten the negatives from Trump’s policies without the positives: slower US data, fading hopes of additional US stimulus, erratic tariff policies and an unexpected large European response,” Skylar Montgomery Koning, a currency strategist at Barclays Plc., said.

On March 25th, the Conference Board reported that US consumer confidence was at a 12-year low and that a recession may be ahead: “The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—dropped 9.6 points to 65.2, the lowest level in 12 years and well below the threshold of 80 that usually signals a recession ahead.”

U.S. Consumers Spending Cuts Signal Trouble

Also, US consumers have been curbing their spending in response to high prices and a worsening economic outlook, according to the consumer finance company Synchrony Financial, as reported by Reuters on March 25th.

Critics say the Trump administration’s imposition of tariffs on its trading partners, threats of taking over Canada and Greenland, acceptance of Russian aggression against Ukraine and the US retreat from historic pledges to defend allies in Europe and Asia have left the United States isolated and alone.

The consequence is that US allies and trading partners now have less reason to buy US stocks and bonds and use dollars to make international transactions.

Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, is the author of the book ‘Exorbitant Privilege: The Rise and Fall of the Dollar.

Summarizing his views in the Financial Times on March 21st, Eichengreen warned that the US dollar’s post-World War II dominance was forged on trade, alliances and institutions and that era is at risk of drawing to a close. He said this was partly due to the Trump administration’s adversarial trade policies: “It has taken Donald Trump only a few months to weaken if not destroy those relationships and that reciprocity. Trump and his appointees question the very values and arrangements on which nearly a century of dollar dominance is based.”

The US role in global trade was already in decline when Trump’s tariffs made things worse: “Consequently, when the weight of an economy in global trade and finance declines, the market forces making for widespread use of its currency have a corresponding tendency to weaken. A perverse “America First” tariff policy destructive of US trade would accelerate this process.”

Eichengreen warns that reckless tax cuts and increasing debt are also driving investors away and could push the dollar over the edge: “...US fiscal and financial woes could, in the not-too-distant future, push the dollar over the edge. The Congressional Budget Office’s long-term budget outlook shows debt in the hands of the public rising from 99% of GDP in 2024 to 116% in 2034, 139% in 2044 and 166% in 2054. Impending legislation, including measures that extend Trump’s expiring 2017 tax cuts, could push debt up even faster. There is no magic debt-to-GDP threshold where confidence is automatically lost. But endless tax cuts, mythical expenditure reductions and high levels of political polarization will at some point cause foreign investors to doubt the dollar’s prospects.”

Unexceptional Performance

Rebecca Patterson, an economist who has worked at J.P. Morgan Chase and Bridgewater Associates, wrote an essay in the New York Times, entitled “America’s Economic Exceptionalism Is on Thin Ice.” In the essay Patterson compared China and the United States. Specifically, she cited how the United States is falling behind as an investment destination: “In China, the world’s second-largest economy, policymakers continue to try to offset a worker shortage by pushing technology and research. At the latest party congress, leaders announced a state-backed fund to support A.I. and other technology, with a goal of attracting nearly $138 billion from the public and private sectors. According to a 2021 analysis from Georgetown University’s Center for Security and Emerging Technology, China has been graduating more science, technology, engineering and mathematics Ph.D.s than the United States since 2007, and its total doctoral grads were nearly double the American number in 2022.”

Patterson’s conclusion: “Simply making America relatively less exceptional is tempting investors to look elsewhere. Less global capital coming to America, including less support for corporate stocks, would make consumers feel less wealthy. Less confident consumers tend to spend less. The flywheel that has powered the economy would turn negative, and the potential for America to become less exceptional will only increase.”