President Donald Trump has welcomed the recent decline in the dollar, but a former Federal Reserve chairman said the astronomical size of the U.S. debt requires greater currency stability.
The US dollar index has plunged 10% over the last year and 1.2% this month alone. It comes after Trump shocked the global market last spring with his “Liberation Day” tariffs, while concerns about exploding debt, central bank independence and a schism with European allies have weighed on the greenback more recently.
“I think it’s great,” Trump said Tuesday of the dollar’s decline. “Look at the business we’re doing. The dollar is doing very well.”
The currency then rebounded somewhat after Treasury Secretary Scott Bessent reaffirmed that the United States had a strong dollar policy and denied rumors of intervention to support the yen.
Former Dallas Fed President Robert Kaplan attributed the dollar’s recent fall to investors buying some tail risk protection by hedging the currency. He also noted that demand for US stocks remains high, contradicting fears of a sell-America strategy.
“Yes, it’s true, a weaker dollar boosts exports,” Kaplan says. told Bloomberg TV on Tuesday. “However, we have a debt in the United States of $39 trillion, on track to reach over $40 trillion. And when you have that much debt, I think the stability of the currency probably outweighs exports. And so I actually think the United States will want to see a stable dollar.”
According to the Peter G. Peterson FoundationUS debt currently stands at $38.57 trillion.
The United States has long enjoyed the “exorbitant privilege” of the dollar as the world’s reserve currency. With such inherent demand for dollar assets like Treasury bonds, the government can borrow money at lower rates than would otherwise be possible.
But Trump’s efforts to upend the postwar world order have raised doubts about America’s financial dominance and the sustainability of the national debt if that advantage were to disappear.
Kaplan points out, however, that the overall health of the U.S. economy and prospects for robust growth provide continued appeal for investors.
“I think there are a lot of strengths in the United States in terms of innovation, a very strong year for GDP growth ahead, in our view, and a lot of positives,” he added.
Rather than fleeing the United States, markets are managing risk by seeking alternative safe havens like gold, Kaplan said.
Meanwhile, Robin Brooks, a senior fellow at the Brookings Institution, argued that a decline in the dollar would not hurt demand for Treasuries. In fact, it might help, he said in a Sub-stack post Friday.
This is because foreign central banks, particularly those in export-oriented Asian economies, have an incentive to buy Treasuries to prevent their currencies from appreciating against the dollar.
“At the current stage, this means that a decline in the dollar should actually be good for the Treasury market,” Brooks wrote. “Dollar weakness mobilizes new demand and, all else equal, puts downward pressure on long-term yields.”
