Trump's threats to fire the Fed chair and raise tariffs will decimate the dollar

Yahoo

19-07-2025

Understanding what motivates normal politicians to follow bad economic advice is difficult enough. Are they paying off some special interest, or do they really believe that two plus two equals three? With Donald Trump, the difficulty of interpreting the motivation for his policies sometimes goes to a whole different level.
Does he understand that if he fires Federal Reserve chair Jerome Powell, the Fed will lose anti-inflation credibility and the general level of interest rates will rise, not fall? Does he really believe that Team Trump can design regulation that makes the crypto sector grow to the moon – bitcoin hit $120,000 (£89,000) last week – without causing another financial crisis?
Tariffs are another dubious idea, with countries being threatened if they do not agree to a 'deal' by 1 August. Any country that believes that by bending over it will secure lasting peace is kidding itself. Trump is having fun brandishing tariffs and, while he might pause, he is not going to stop. Besides, he and his acolytes see the tariff weapon as a way to exercise power the United States has always had but never exploited. Trump is not just looking to use tariffs as an economic tool. He sees them as a bludgeon that can be used to impose his will on almost any country on almost any issue.
Over the long run, Trump's retreat from globalisation, combined with his tariff fetishism, are likely to lower US growth while raising interest rates and inflation. It might be a winning strategy for Trump personally by making him the centre of attention, but it is not a winning strategy for the US economy.
And none of this, imposing tariffs, promoting crypto, or attacking the Fed, can be good for the US dollar, the world's reserve currency, which has already plummeted sharply in value this year.
The centrality of the dollar, which is the lingua franca of global trade and finance, has long helped the Americans to enjoy substantially lower interest rates than they would otherwise be paying, perhaps 0.5% to 1% lower. This applies not only to government borrowing but to private mortgages, car loans and business loans.
Trump sees tariffs as a bludgeon that can be used to impose his will on almostany country on almost any issue
The savings amount to hundreds of billions of dollars a year, at a minimum. The dollar gives the US the ability to use financial sanctions in lieu of military intervention, and also gives the US a treasure trove of information on both friends and enemies alike.
Dollar dominance was fraying at the edges even before Trump, especially with the Chinese yuan gradually decoupling its dollar peg, and Chinese authorities developing their own international settlement systems. Europe has also been looking to expand the footprint of the euro. Now, however, with attacks against the Fed, the tariff war, and general undermining of the rule of law, what was going to be a gradual decline in the dollar's influence will surely accelerate.
The dollar is not going to disappear, but its position could become significantly less dominant over the next decade, with the Chinese yuan becoming more important in Asia, and the euro taking back some of the global influence it lost after the European debt crisis. The dollar's loss will also be crypto's gain, especially in the global underground economy,
Trump's rejection of globalisation, and his embrace of chaotic policies, is mostly a lose-lose situation for the US economy that will result in more inflation volatility, higher interest rates, and a spate of financial crises, including in crypto, and possibly surrounding government debt. What will Trump conjure up to distract everyone if the economy turns sour?
Kenneth Rogoff is Professor of Economics at Harvard University and author of Our Dollar, Your Problem: An Insider's View of Seven Turbulent Decades of Global Finance, and the Road Ahead
Photograph by Eric Lee/Getty