Theodore Bunzel
Talk of the U.S. dollar can have a frustratingly abstract, near-mystical quality to it. Even putting aside the crypto crowd’s pseudo-philosophising about the future of money, when most commentators speak of the dollar as a “reserve currency,” it’s often imprecise and conjures up an image of greenbacks stored in central bank vaults. This, in turn, is meant to provide the United States with far-reaching economic superpowers.
Yet the fate of the dollar is nonetheless an important story to tell, especially these days. After April 2, when U.S. President Donald Trump imposed sweeping tariffs—bringing the U.S. average effective tariff to its highest level in nearly a century—the dollar started behaving strangely. An economic textbook would tell you that U.S. tariff hikes strengthen the dollar: Higher duties decrease U.S. demand for (now higher priced) foreign goods and therefore demand to swap dollars for foreign currencies to pay for those goods. Yet the dollar fell after April 2—it has declined 8 percent thus far this year—and there were periods in April when the dollar fell, bond prices fell, and U.S. equity markets fell, an alarming trifecta mostly seen in emerging markets as a sign of panicked capital flight. What’s going on here?
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