The Falling Dollar

Caitlin McCabe, writing for The Wall Street Journal, reports that the ICE U.S. Index has declined more than 10% in 2025, the largest drop since 1985. She lists three reasons for the decline: President Trump’s tariff policies, fears that the Federal Reserve will lose independence, and growing concern over U.S. government debt. Her list is on the mark, and Trump owns two of the three reasons. He caused them. The third reason, the debt, Trump shares with his recent predecessors, despite his attempt to take sole possession of this reason with his budget deal. I will focus on one of the three causes for the decline in the value of the dollar: Trump’s tariff policy, which is intentionally designed to devalue the dollar, but first I measure the drop of the dollar using two graphs derived from the Nominal Broad U.S. Dollar Index data series (DTWEXBGS) curated by the Federal Reserve Bank of St. Louis. 

The first graph (below) plots the value of the dollar from January 20, 2025, when Trump took office, until July 11, 2025. It is similar to the graphs that have circulated in other articles, although the exchange rate indexes vary; like the others, it shows a significant decrease, with this index showing a 6.43% decline since Trump began his second term.

The second graph (below) plots the value of the dollar over a longer horizon, beginning on July 1, 2007. The graph is placed beneath this paragraph. The green line again represents the exchange rate. The vertical lines represent the beginning of a presidency, with Democrats in blue (Obama, then Biden), and the only Republican, Trump, whose discontinuous first and second terms are in red. The gray rectangles highlight the Great Recession, and to COVID recessions. My numerical analysis begins on January 1, 2009, day after President Obama took office. The first observation is that, although the exchange rate has fallen, it starts at its highest value over the 16.5-year period. The exchange rate remains high, higher than 83.42 days during the entire period. The second is that the exchange rate increased under Obama’s two terms (15.88%), and Biden’s single term (16.35%), while it decreased during Trump’s first administration (-4.94%), slightly less than the 6.43% decline to date in his second term. The dollar is falling because that is Trump’s goal.

The president has long believed that tariffs can stop other countries from “cheating” the U.S. in trade. Stephan Miran, Trump’s Chairman of the Council of Economic Advisors, has developed a theory that supports the president’s position. He believes that it is costly to the United States for the dollar to be the world’s reserve currency, and that the president can eliminate the cost by imposing tariffs on other countries if they don’t retaliate (See CEA Chairman Steve Miran Hudson Institute Event Remarks, The White House, April 7, 2025). 

 A falling dollar reverberates through the economy, as a couple of examples will make clear. Consumers who buy imports will pay more. If an imported product, such as an SUV, has an American substitute, like a Ford produced in Michigan, the American manufacturer and its suppliers, including labor, will benefit. The consumer is likely to pay more for the Ford than the pre-tariff foreign SUV. If you like bananas or coffee, you are out of luck. You will pay more. American firms that export products and their suppliers will find their products are cheaper in foreign markets relative to competing products. 

 Because interest rates increase when the dollar falls, the most significant cost to Americans might be the interest on the debt. Combined with the larger deficit caused by the One Big Beautiful Act, interest payments will grow absolutely, and as a percentage of the total budget. The probability of the U.S. defaulting on its debt obligations will also increase, potentially introducing an era of stagflation characterized by high inflation and low economic growth. 

Will Trump’s tariffs, supported by Miran’s theory, bring renewed vigor to the American economy? Kenneth Rogoff, the coauthor with Carmen Reinhart of “This Time is Different: Eight Centuries of Financial Folly,” argues that it will not. Writing “Miran’s plan, clever as it might be, is based on a flawed diagnosis. While the dollar’s role as the world’s leading reserve currency plays a part, it is just one of many factors contributing to the United States' persistent trade deficits. And if the trade deficit has many causes, the idea that tariffs can be a cure-all is dubious at best” (Kenneth Rogoff. "Trump’s Misguided Plan to Weaken the Dollar,” Project Syndicate, May 6, 2025.