Compared to US stocks which have suffered recently at the hands of investors alarmed at President Donald Trump’s tariff tantrums, the dollar has thus far escaped severe punishment.
But that may be poised to change, at least according to participants at a recent panel discussion at the Foreign Correspondents Club of Japan in Tokyo.
The dollar, which is currently valued at around 150 to the yen, will sink to nearer 115 yen before long, Jesper Koll, a veteran Japan financial and economic analyst, predicted.
“America will get a weaker dollar,” he said at the panel discussion, “but it’s called a bad weak dollar because it will be because of an American recession”.
Barry Eichengreen, an economics and political science professor at the University of California, Berkeley, noted in the Financial Times recently that the dollar, which he called “the sun around which the other elements of the post-war international system revolved – could be entering a period of fundamental decline”.
There has been talk in Washington that the Trump administration is considering a new international monetary agreement, decades after the Plaza Accord was reached in 1985 to depreciate the dollar and reduce US trade deficits with Germany, Japan and other nations. This time, however, it would be a Mar-a-Lago Accord, named after Trump’s residence in Florida.
But for experts such as Yuqing Xing, an economics professor at the National Graduate Institute for Policy Studies in Tokyo, the idea of a Mar-a-Lago Accord is a non-starter.
He pointed out at the panel discussion that China and Japan hold more than US$1 trillion in dollar bonds between them, and that the idea that they would actively agree to devalue the dollar and their own holdings is naive.
The idea mooted within the Trump administration that US Treasury investors might be persuaded to swap their short-term holdings for long-dated government bonds of up to 100 years in order to support the dollar for the long term were also dismissed as naive.
According to Koll, the idea of a new Plaza-type deal is “impossible”. He noted that the volume of foreign exchange transactions has at least quintupled since the era of the Plaza Accord, when the US, German and Japanese central banks dominated.
This is no longer the case and getting the global central banking community on board with the idea of a dollar-weakening strategy verges on the absurd, especially at a time when the Trump administration is waging tariff wars on most key trading partners.
Bets against greenback
Even if there is little international support at the official level for the idea of collective action to push the dollar down, markets are voting with their feet.
By mid-March, speculative traders had begun “betting against the dollar” for the first time since Trump’s election last November, according to a Bloomberg report. It said Deutsche Bank’s global head of foreign exchange strategy George Saravelos warned clients recently that the “chance of the dollar losing its safe haven status as markets adjust to a new geopolitical order needs to be acknowledged as a possibility”.
Trump does not seem to know quite what he wants: a weaker dollar to boost US export competitiveness, or a strong dollar to ensure that the greenback preserves its status as the world’s leading reserve currency.
The BRICS nations – principally Brazil, Russia, India, China and South Africa – want the dollar cut down to size, but not too quickly. Likewise, financial markets want to avoid a dollar rout.
The fact that the dollar has not crashed so far has less to do with central banks and others investors having full faith and trust in the US Federal Reserve and the US Treasury than with the fact that there are few other places to go to invest foreign exchange reserves and other fund pools.
The world’s biggest finance pool is the global bond market, worth $140.7 trillion as of 2023, according to data from Sifma, the securities industry’s trade group. The US bond market accounts for around $55.3 trillion of that, by far the biggest share.
The European, Chinese and Japanese bond markets are sizeable, but far behind the US. China’s markets are also subject to capital controls and thus lack liquidity and appeal.
The European Union is now seeking capital market unification, which should make the euro more attractive.
As receptacles for investment, nothing compares in size and liquidity with the US bond market. But markets seem to be taking the view that this situation cannot continue for much longer.
