A Weakening Dollar, Recession Fears, and Economic Uncertainty: What the Economy Looks Like in the New Trump Era

In the short time since Trump started his second presidential term, he has enacted many controversial economic policies that have massive economic impacts at home and internationally. Source: Alice Morgan

Amid recent economic policies imposed by the Trump Administration – including heightened tariffs and steep spending cuts – a growing concern is the value of the United States Dollar. The U.S. Dollar Index, which measures the value of the dollar relative to other major currencies, is down 5.5% from January and continues to fall. The weakening of the dollar can be attributed to many factors, including uncertainty about the future, political instability, and declining investment. 

While a strong dollar is often viewed positively, the Trump administration appears to favor a weaker dollar and is taking steps to devalue the currency. In 1985, the Reagan administration recognized the need to devalue the dollar and met with other global leaders to discuss this in a meeting now known as the Plaza Accord. Thirty years later, Trump wants to replicate this in a modern context through a so-called “Mar-a-Lago accord” to decrease the value of the dollar. This weaker exchange rate would ideally increase the competitiveness of US exports, therefore increasing domestic manufacturing, and reduce the trade deficit. However, this comes with many potential consequences, such as the end of the era of the US dollar as the globally dominant currency. Whether the dollar depreciates naturally or is devalued through Trump’s economic policy, the value of the dollar remains a key indicator in Trump’s plan to reshape and restructure the economy.

The strengthening of foreign economies, especially those in Europe, also does not help the situation. The euro is up 6% against the greenback, and many European countries remain positive in their economic outlook. Germany recently announced it would be increasing its spending on infrastructure and defense, and the Spanish government improved its economic outlook for the coming years. Manufacturing in the US is also expensive, even compared to Europe, but especially to Asia, so, even if Trump successfully devalues the dollar, it is unclear what the exact effect could be on reducing the trade deficit. 

Additionally, other economic concerns have been growing amidst the recent drastic changes imposed by the Trump administration. Goldman Sachs recently predicted a 35% chance that the US will enter a recession, defined as a period in which the GDP contracts for two consecutive quarters, while other forecasters predict a 50% chance. Goldman Sachs cited reduced household and business confidence and uncertainty regarding future policies as key drivers of their increased prediction of a recession, while the Congressional Budget Office has warned about the United States’ high national debt, which continues to increase. Moody’s Ratings expressed concerns over the high debt levels as well, warning that it may weaken the US’s stance as an economic hegemon, especially when it has come with “sustained high tariffs, unfunded tax cuts and significant tail risks.”

These economic risks are bound to have an impact on the lives of Americans. In the Trump administration’s eyes, a weaker dollar means a boost in manufacturing, therefore an increase in export revenue and employment in related industries. However, high tariffs mean increased costs for consumers, especially since the US relies heavily on imported goods, and inflation, as some of the burden of the tariffs will fall on the consumer. Uncertainty about the future will mean reduced spending for households, and the unsettling political and economic future is the reason for financial stress for many Americans. Additionally, spending cuts may reduce the necessary infrastructure that many families rely on.

While the challenges that Trump aims to address, like high national debt, trade deficits, and overdependence on imports, are valid, a more balanced approach is needed to tackle these issues without causing sudden instability. There are various steps the government can take to address economic issues without imposing extreme and drastic changes.  For example, in terms of monetary policy, the Federal Reserve can reduce interest rates gradually to encourage borrowing and spending while reducing investment to intentionally devalue the currency. The Trump administration should also consider supply-side policies, such as investing in education, technology, research, and innovation to create long-term benefits in increasing American exports, and encourage innovation in new energy forms to decrease reliance on imported energy. Furthermore, targeted tariffs towards specific nations and products, in place of broad, sky-high tariffs, may help protect the American economy without creating high political tension and risking trade wars. 

While these are potential policies to address important economic challenges, they may not align with Trump’s short-term focus on restructuring the economy and willingness to create a high-risk economic environment, even when it comes at potentially catastrophic threats to Americans. While Trump has only been in office for just over two months, he has sparked a considerable amount of economic change and controversy. However, the greatest changes are still to come and unpredictable given the volatility of both the economic environment and the president’s actions.