Eswar Prasad
Last year, the United States appeared to be consolidating its pole position as a haven for international investment. The U.S. economy’s remarkable strength relative to other major economies helped account for a nearly ten percent surge in the dollar’s value in the fall of 2024. The economy and labor market continued to perform well leading up to and following Donald Trump’s inauguration. And inflation was gradually falling back toward the Federal Reserve’s target of about two percent.
But since he came into office, Trump has sowed doubt among both domestic and foreign investors. His “Liberation Day” announcement, on April 2, of across-the-board tariffs on all U.S. trading partners disrupted global trade and roiled financial markets. Even though the White House has paused or lowered some of those tariffs from their initial sky-high levels, the damage has been done. The uncertainty the tariffs fomented in international trade has hurt growth prospects for the remainder of this year. This is true in particular for the United States, because the tariffs affect virtually all U.S. trade. Consequently, it has become more likely that the Federal Reserve will have to cut interest rates later this year to support the economy. This, in turn, has caused the value of the dollar to fall roughly back to its September 2024 level, before its ten percent increase.
These developments have even raised questions about the dollar’s historic role as a refuge for international investment. In the past two decades, every instance of economic and financial turmoil resulted in a mad dash by investors around the world for safe financial assets in which to park their money while the storm blew over. As I argued in Foreign Affairs last summer, those instances invariably featured swelling demand for U.S. Treasury securities, long seen as the safest of assets because of the U.S. economy’s stability and because these securities are available in large quantities and easily tradable. This higher demand typically pushes up the price of Treasury securities and drives down their interest rates, making it easier for both the U.S. government and American households to borrow cheaply. The inflow of money into dollar assets also props up the dollar itself.
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