The Fate of the Dollar Depends on the US Elections

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The author is a professor of economics and political science at the University of California, Berkeley.

The fate of the dollar, like many other things, will depend on the outcome of the US presidential elections next November. Everyone agrees on that. They just disagree on the direction the change will take.

The implications of a Democratic victory are relatively uncontroversial. The dollar has been strong in recent years because President Joe Biden has championed a large dose of fiscal stimulus while allowing the Federal Reserve to raise interest rates in response to inflation. This mix of loose fiscal and tight monetary policies has allowed the currency to strengthen, as textbooks predict.

But with a budget deficit already large and national debt reaching levels that many Americans find alarming, a Biden re-election or a Democratic replacement if he resigns after last week’s debate would have less fiscal room. At the same time, the Fed would be able to cut its policy rate as inflation recedes, which is likely to be the case. So the policy mix would be less positive for the dollar in a second Biden term. That by no means portends a dollar crisis, but it is a recipe for a somewhat weaker greenback.

Finally, the Biden administration was careful to cooperate with its allies when imposing financial sanctions on Russia. Thus, using the dollar as a weapon did not lead to a widespread diversification of reserves that could have weakened the currency. Cooperation meant that other countries potentially targeted by sanctions had nowhere to go.

The monetary consequences of a second Donald Trump presidential term are harder to predict. It’s tempting to extrapolate from the past, as a team of Citi analysts did earlier this year. The dollar rose about 5% after Trump’s surprise victory in 2016, they observed. It fell by a similar amount when he lost the election in 2020. Given that, it’s tempting to think that a Trump victory in 2024 would mean a stronger dollar again.

Indeed, Trump may be planning further tax cuts for corporations and the wealthy. He is less likely to criticize debt and deficits when he is the author of them. And we have seen how expansionary fiscal policy can have positive effects on the dollar.

Similarly, new import tariffs, despite their costs, are also likely to support the dollar. Tariffs make imports more expensive. They encourage consumers to shift spending toward domestic goods, which also pushes up prices. The Fed is likely to respond to the resulting inflation by raising rates again, which would strengthen the dollar. A stronger dollar exchange rate would lower import prices, at least in part, helping the central bank achieve its disinflation goal.

But there are other scenarios. As a self-proclaimed advocate of low interest rates, Trump could pressure the Fed not to respond in this way. The result, sustained inflation, would be negative for the dollar. Trump’s advisers have already discussed changing the Fed’s legal position, mandate, or procedures to require it to consult with the president, or even follow his orders. In any case, in May 2026, Trump, once president, would have the simple option of appointing a more dovish Fed chair. He would probably do so, having learned from what he describes as his mistake in choosing Jay Powell, who was sworn in in 2018.

In addition, there are rumors that influential Trump advisers are plotting to weaken the dollar. They have seen how the currency’s strength offset the trade balance impact of tariffs imposed during Trump’s first term. They seem determined to prevent that from happening again.

They are likely to advocate additional sanctions against countries that do not ensure that their currencies do not collapse against the dollar. They may cite the 1985 Plaza Accord as an example of how the United States can pressure foreign governments to adopt policies that strengthen the exchange rate. Another idea would be to impose a tax on foreign purchases of U.S. assets to prevent such foreign investments from propping up the dollar at high levels.

It is questionable whether these dubious measures would actually achieve their goal of strengthening the competitiveness of American manufacturing. A tax on foreign capital that discourages investment in the United States would not make the American economy more competitive. Threatening countries with additional tariffs if their currencies do not fall could only have the undesirable effect of strengthening the dollar even further. But, dubious or not, such measures cannot be ruled out.

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