Washington appears conflicted over the role of the dollar. On one hand, the administration champions a strong dollar as a symbol of American global leadership and the bedrock of the international financial system. On the other, it views the currency as dangerously overvalued—undermining U.S. industrial competitiveness and exacerbating the nation’s massive trade deficit. In the end, will it fall to financial markets to resolve this contradiction?
The dollar is arguably the most potent symbol of American economic power. It’s little surprise that every U.S. president has, at least rhetorically, endorsed a “strong dollar” policy. President Trump is no exception—at least strategically. He has affirmed the need to defend the “almighty dollar” and preserve its role as the world’s dominant reserve currency. The president has responded strongly to de-dollarization efforts by emerging economic blocs like the BRICS, threatening retaliatory sanctions.
Yet in the short term, the dollar policy has been driven more by tactical considerations than long-term strategic ones. Reducing the trade deficit—in recent years 3-4 percent of GDP—has become the centerpiece of Washington’s economic agenda. The preferred tools: high import tariffs and a cheaper dollar.
Is Strong Dollar the Culprit?
President Trump has repeatedly declared that the dollar is “too strong,” “killing our industry,” and “destroying our competitiveness.” Key members of the administration share this view, arguing that the dollar’s long-standing overvaluation—by an estimated 20 to 25 percent—is a major contributor to the U.S. trade gap and the erosion of American manufacturing. This overvaluation, they argue, stems largely from the dollar’s global reserve status, which fuels strong foreign demand for U.S. financial assets—especially Treasuries—and artificially props up the currency.
The strong dollar has undoubtedly contributed to the widening trade imbalance. However, the U.S. trade deficit has been on an upward trajectory for more than half a century—persisting through significant fluctuations in the dollar’s value.
The deeper cause is America’s structural macroeconomic imbalance: chronically low national savings paired with excessive consumption. This underlying mismatch is the fundamental driver of the persistent trade deficit.
In 2024, the U.S. national savings rate was just 17 percent of GDP—exceptionally low by advanced-economy standards—while the investment rate stood at 22 percent. This gap is financed by importing foreign capital, mainly through selling U.S. securities, which in turn
deepens America’s external indebtedness. The U.S. is now the world’s largest debtor nation, with foreign investors holding roughly a third of Treasury debt. This capital inflow—not the reserve currency status alone—is the key force pushing the dollar above its underlying value.
“Twin deficits” in Action
While both households and government contribute to America’s overconsumption imbalance, the ballooning federal budget deficit is the primary culprit. It surged to 6.4 percent of GDP last year and is poised to grow further. The “twin deficits” theory, long debated in policy circles, now finds empirical support: IMF research shows that each $1 increase in the fiscal deficit typically worsens the current account balance by $0.30 to $0.50.
This pattern is likely to continue in the coming years. Independent forecasts suggest the fiscal deficit could rise to 7 percent of GDP or higher by the end of the decade, driven by a combination of tax cuts and modest spending restraints. The latest tax-and-spending package passed by Congress will likely add more than $3 trillion in new debt over the next ten years.
Over the past six months, the dollar has depreciated by 10 to 13 percent against major currencies—an unusually sharp drop over such a short span. But this decline was not by design. Rather, it reflected financial markets’ strong reaction to the administration’s aggressive tariff policies and the heightened economic uncertainty they have generated.
The real shock came in April, when the administration unveiled a sweeping tariff package that sent shockwaves through the global trading system. Markets initially panicked. Despite a surge in bond yields, the dollar fell—defying both expectations and historical precedent. With a soaring fiscal deficit, mounting federal debt, and a resurgence of inflation fears, global investors grew increasingly uneasy. Capital has begun flowing out of U.S. markets in what some Wall Street analysts—albeit with some hyperbole—have dubbed the “Sell America” moment.
Traditionally, the dollar has been a safe-haven asset in times of turmoil. Not this time. Even as the dollar remains the world’s key currency, the recent market turbulence encourages foreign central banks and institutional investors to diversify their portfolios—reducing exposure to the greenback and U.S. securities.
Future of Pax Dollar
According to Kenneth Rogoff, one of America’s most respected currency experts, the era of Pax Dollar “in which the dollar was utterly dominant and reliably stable may have passed its peak.” The greatest dangers to the dollar supremacy come from within. If left unaddressed, outsized deficits and debt could force the dollar into a long-term retreat. Rogoff believes the dollar may continue sliding until it reaches a sustainable equilibrium. Meanwhile, “external” challenges are emerging: rising interest in gold, the euro, the Chinese renminbi, growing use of national currencies in Global South trade and the looming arrival of digital currencies. The Economist projected that the dollar’s share of global foreign exchange reserves—currently at 58 percent—could fall by as much as 10 percentage points over the next decade.
So far in 2025, financial markets have already erased about half of the dollar’s presumed overvaluation. But it’s a fantasy to think this alone will resolve America’s deep trade imbalances.
A turbocharged tariff strategy isn’t likely to deliver a structural fix either. What’s needed is a long-overdue reckoning with America’s macroeconomic fundamentals—beginning with genuine fiscal discipline and policies that strengthen national savings.
Until then, the dollar’s decline may be less a strategic choice than an unavoidable consequence.
*István Dobozi is a former lead economist at the World Bank.
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KEYWORDS debt, fiscal deficit, reserve currency, tariff policy, USA
