by Rebecca Patterson, Vice Chair, Bretton Woods Committee

Why is there so much focus on the strength of the U.S. dollar?

Because of its role as the world’s reserve currency, confidence in the U.S. dollar and its long-term stability as a store of value and medium of exchange is critical. Cyclical ups and downs in the dollar are not a threat to this role, but big changes caused by unexpected policy shifts could be.

U.S. dollar strength inversely correlates with foreign currency weakness which affects the competitiveness of US exports and the price of US imports. That in turn affects economic activity. Economies like Canada and Mexico can be particularly sensitive to the dollar’s trend given their close trade links to the U.S.

What are the consequences of a strong and weak dollar?

A strong US dollar (1) makes US exports more expensive for foreign buyers, reducing export demand and potentially weighing on domestic manufacturing and employment; (2) lowers the cost of imported goods, helping to keep inflation in check and benefiting US consumers through cheaper prices on everything from electronics to raw materials; and (3) can attract capital inflows to the U.S. that raise asset prices and widen the trade deficit, posing longer-term risks to economic balance but generating wealth gains for asset owners.

In general, a weaker dollar (1) makes US exports more competitive overseas; (2) makes it more attractive for foreigners to visit the U.S. (tourism accounts for about 3% of U.S. GDP); and (3) potentially lifts US inflation. Imports represent about 17% of the US consumer price index (CPI). The Federal Reserve considers the impact of dollar weakness on inflation as it sets policy. A weaker dollar and higher import prices, all else equal, could cause Federal Reserve officials to keep monetary policy tighter for longer.

What is the Trump administration’s dollar policy?

The administration has two goals in mind. First, it wants the U.S. dollar to maintain its status as the world’s global reserve currency. Because the dollar is used so widely—in 88% of international currency transactions—it can be a powerful geostrategic tool. As an illustration, the U.S. froze roughly $300 billion in Russian central bank reserves in 2022 with support from allies to punish Russia for invading Ukraine. The dollar’s role also means that central banks, with significant reserve holdings of U.S. dollar assets, rely on the Federal Reserve to assist with dollar liquidity during periods of stress.

Second, at the same time it maintains its global dominance, the US government wants a weaker dollar to make US exports more competitive and support manufacturing. US goods exports currently represent 11% of the country’s GDP. The nominal trade-weighted dollar, the currency’s value against key peers, has gained more than 40% since 2011 and is broadly considered overvalued today. Dollar appreciation has occurred even as US firms sold dollars to pay for imports; that dollar selling was overwhelmed by net capital flows into US financial assets.

How is the US government trying to engineer a weaker dollar?

Currency values are heavily influenced by relative interest rates. With that in mind, the Trump administration hopes to weaken the dollar in part by reducing inflation, as this would make it easier for the Federal Reserve to cut short-term interest rates. To push inflation down, the administration has focused on increasing oil supply to lower energy prices. The administration also expects that deregulation can raise productivity and restrain inflation.

Other ideas to weaken the dollar have been proposed by Council on Economic Advisors Chair Stephen Miran in what’s called the Mar-a-Lago Accord. Among other ideas, the Accord contemplates foreign central banks swapping their current holdings of U.S. Treasuries into longer-term Treasury bonds with lower yields (to maintain the same duration exposure of Treasury bonds, foreign central banks would need to buy fewer dollars to buy the longer-duration bonds, thus reducing overall dollar demand). However, Treasury Secretary Scott Bessent and others have suggested that, for now at least, this is not being actively considered.

These efforts could be offset to a degree by the administration’s trade policy. Reducing imports and increasing exports—a smaller current-account deficit – means a net increase in dollar demand. That dollar support could be countered by greater net buying of foreign financial assets, which would entail dollar selling as part of that process.   

What’s happening with energy prices and the dollar now?

Since the start of the Trump administration, energy prices have fallen. Brent crude oil prices, for instance, are down about 16% through early May 2025. Some of that decline is due to more overseas’ supply, and a significant further increase in supply could push prices even lower if agreements with Russia and Iran led to their re-entry into global markets. However, an expected reduction of demand tied to the ongoing trade war has also played a role. So far, the fall in energy prices has not been sufficient to cause the Fed to ease policy.

Even with steady short-term interest rates, the dollar has fallen substantially this year, down nearly 10% between mid-January and early May against key counterparts. This weakness has occurred in part as trade and other policies have caused foreign investors to reduce their exposure to US financial assets.

What other steps are being considered to weaken the dollar?

Currencies are likely to be part of ongoing trade negotiations in countries where the U.S. perceives that a country has kept its currency unfairly undervalued as a way to support its exports. In those cases, the U.S. is expected to press trade partners to take steps to strengthen their currency against the dollar, potentially through higher interest rates in that country or central bank intervention.

Currencies in focus for the U.S. government are highlighted in a twice-yearly report published by the Treasury Department. The last one in November 2024 had seven countries on its currency “monitoring” list: China, Japan, Korea, Singapore, Taiwan, Vietnam, and Germany. 

Speculation of US pressure was likely a factor that drove an unprecedented appreciation of the Taiwan dollar (8% in two days in early May), although the Taiwanese central bank has denied any recent US discussions around the currency.

Featured author: 

Rebecca Patterson, Vice Chair, Bretton Woods Committee