The U .S. dollar is down this year by a lot, and it's making some people think twice about its role as the world's reserve currency.
Now, that's a pretty radical proposition after decades of dollar dominance, and it could have consequences for the U .S.
But recently, there have been signs that President Donald Trump may just want a weak dollar.
This is Swamp Notes, the weekly podcast from the FT News Briefing where we talk about all of the things happening in US politics.
I'm Sonya Hudson. This week we're asking, could a plan to weaken the dollar make America great again?
Here with me to discuss is Jillian Tett, a longtime economics commentator for the FT and the former editor of Moral Money.
Hi, Jillian. Great to be on the show.
Great to have you. We've also got Katie Martin, host of the Unhedged Podcast and author of the FT's Weekly Long View column.
Hi, Katie. Hi. Hi. Thanks for having me.
Thanks for being on the show.
So Jillian, I'm going to start with you and I want to ask you to just set the scene for us.
Why are we talking about this this week?
We're talking about it this week because the markets are in the middle of a very nasty wave of volatility in turmoil.
Although most people expected the stock market to soar under Donald Trump and it did initially soar and they also expect the dollar to strengthen quite sharply, in reality the stock market has been tumbling and officially got into correction territory and the has weakened and it's spooking a lot of people.
So Katie, can you give us a little bit more detail about what has been going on with the dollar recently and what people are saying about it?
Yeah. So it has been a very interesting week that, as Gillian says, there has been a big shakeout in US stock markets.
And one of the things that's interesting about that is that different bits of it are not matching up in the way that they usually do.
So typically Basically if investors are feeling nervous about stuff, then they buy the dollar and they buy US government bonds.
One thing that's really sticking out to me at the moment is that that's not really happening.
Yes, people are selling US stocks.
European markets are hanging on much better, but you're not seeing an explosive jump in the dollar or in US government bonds, and there has to be a reason for that.
There's a couple of interpretations.
One is, that investors are taking a view that all of this back and forth from the Trump administration on tariffs -on, tariffs -off, it makes it a very difficult environment for businesses to succeed and it points towards a slowdown in the US economy.
That helps to pull down the dollar.
But we also have this sort of point where because bonds aren't jumping in the way that normally do, that tells me that investors think not that this is necessarily just an economic slowdown, this isn't something that the Federal Reserve can cut rates into to solve the problem.
It suggests there's a little bit of nervousness around US government bonds and the dollar in and of themselves as investment destinations and that's a big break with the past potentially.
Okay. So, this is something beyond what we would normally expect of the markets.
Jillian, where do you think President Trump's head is in all of this?
So Donald Trump's vague goal, in surprise, he has a goal is so -called to make America great again.
He's not a greater economic thinker.
I think he's driven more by emotion and instinct.
So, he vaguely wants to try and make America great again.
That's the overarching goal.
Well, the strategy that's emerging around some of his advisors is to try and reset the global financial and trade system.
And I should say the military system as well because they see them as entwined in really quite a radical way.
And the tactics they're using are basically classic bully boy tactics of aggression and threats, both military and financial and business, all the tariffs that are on again, off again.
and the air of unexpected capriciousness and uncertainty that's leaving everyone else on the defensive and on their toes.
Right, so as you wrote recently the chaos around tariffs and other things that the Trump administration have been doing is a feature, not a bug.
The uncertainty is helping the Trump administration create this environment in which countries may want to sign deals that are bad for them just to stop feeling endlessly threatened by the US.
Katie, what's the argument for why a strong dollar has actually disadvantaged the U .S.?
The thinking from people close to Trump is that the role of the dollar as such a massive part of the global financial system is a blessing and a curse.
So, people sometimes refer to it as a bit of a burden.
And that's because investors of all different stripes all around the world scoop up U .S.
dollar assets. That pushes the dollar higher.
And the higher the dollar is, the more expensive U .S.
exports to the rest of the world become.
So the argument is that this is one part of the reason why U .S.
manufacturing has been hollowed out.
so other countries can weaken their currencies and that makes their exports more attractive and it's much more difficult for the U .S to do that because there is such a huge bedrock of demand for U .S dollar assets.
That includes stocks, but also U .S government bonds.
But when you actually get down to the nuts and bolts of how you might be able to square this circle and come up with a way in which the world's goods and commodities are still priced in dollars and the world's financial system kind of revert back to dollars and is based in dollars, but you don't have a strong dollar.
It's quite difficult to imagine how those two things match up.
And also, it kind of overlooks the idea that because you have a strong dollar, that means that the US has been in a fantastic position over the past few decades to buy goods and services from overseas really cheaply.
But the focus for the US administration is on manufacturing, you know, some of the advisors close to Trump draw a pretty straight line between the opioid crisis in the US and the position of the dollar.
So they see this as strategically very important to the to the administration.
But it's an awfully difficult thing to fix.
So let's talk a little bit about those nuts and bolts of how this could actually happen.
There is this recently resurfaced essay by Stephen Myron, who is now chair of Trump's economic advisors.
Scott Bessent, the Treasury Secretary, has also weighed in on some of these theories.
What is their idea of how to actually make this happen and devalue the dollar?
Well, I think that he is, first of all, laying out a set of ideas which will horrify many people and which some people would dismiss as mere lunacy and contradictory.
But these ideas do have a very strong internal logic, even if you don't like it.
And they are certainly affecting the way that the administration looks at what it's doing at the moment.
And Moran himself admits that the path to actually implementing this big reset of the global financial and trading system is quote very narrow.
So what they want to do is one way to explain it is through Scott Besant's three arrows framework which is borrowed from the Japanese.
And that involves aiming for a 3 % deficit, a 3 % growth rate, and a $3 million barrel increase in oil production, and they believe that essentially they can use the dramatic increase in oil and gas production to lower energy costs, which, coupled with deregulation, will mean there's less inflation in the economy and offset the potentially inflationary impacts of tariffs.
That's the theory. They think that deregulation and tax cuts will drive fast growth and essentially enable the US, to grow its way out of the deficit and debt.
They think that cutting the government, as Elon Musk is doing through such a dramatic set of so -called Doge programs, would essentially enable the private sector to flourish dramatically and offset any drag down from reducing government activities.
And they also think that they can use tariffs to threaten other countries into essentially opening up a lot more of their markets at a lower cost to American products and or putting a lot more investment into America to help the American economy and that in so far as it threatens to strengthen the dollar, they will be able to get other countries together and they will collectively agree to weaken the dollar through a treaty and a deal.
In addition to that, they are looking at other mechanisms to try and change capital flows.
One idea is to restructure parts of the U .S.
debt with forcing Treasury holders to swap it for long -term potentially potential instruments.
Another idea is to try and put taxes or some kind of break on the capital inflows in order to again rebalance the current account and the trade as well.
These are all highly controversial ideas.
they may never see the light of day.
But those are some of the ideas floating around as people try to formulate a plan for the second Trump term.
I mean, it's one of the interesting things there is that, you know, as Julian is quite right to stress that none of this may see the light of day.
But in a sense, that may not matter.
Because already what is happening among investors that I speak to and analysts at investment banks that I speak to is that just the presence of this uncertainty and the presence of this idea swirling around the corridors of power is enough to make some investors question whether they want to be as heavily exposed to U .S.
assets as they've been in the past.
So the administration is perhaps unwittingly already sowing some uncertainty into stuff that is supposed to be the risk -free part of global markets.
And so, it may well be, as Gillian says, that in policy circles, people are not talking about the end of the dollar as a reserve currency.
But in markets, I can assure you that people are talking about that even as a fringe possibility.
And you only have to undermine that sort of credibility and reliability a little bit for it to have potentially quite a significant impact.
So, Gillian, I read your piece about this as kind of a warning not to underestimate the intentionality of the Trump administration, but how likely do you think it is that Trump actually attempts to do all of this?
Well, I think trying to predict what Trump's going to do is an absolute mug's game.
And you know, if I knew what was in his mind, you know, I would be probably trading the markets.
The, you know, so there are a number of factors we just don't know about.
one is how these factions around him continue to compete and who comes out on top.
Secondly, we don't know how he's going to respond if the stock markets collapse and if there's some kind of populist revolt, already we're getting signs that parts of the MAGA base are pretty unhappy and that could swell and that could force a considerable U -turn.
And them. And the other thing we don't know about is how the rest of the world responds.
I mean, there's that wonderful issue of events, dear man, events.
And we may see some dramas on the world stage, which again, force a switch in policy.
What about you, Katie, what are you thinking about as we wrap up this conversation?
I think the thing underpinning this whole conversation that's really important to bear in mind is that money is power.
And the dollar is power.
So for example, when Russia launched its full scale invasion of Ukraine three years ago, one really important thing that the US did in response to that was shut Russia out of the dollar financial system and freeze its dollar reserves.
This was a really important way of trying to bring Russia to heel.
And that's only possible because the US is home to the world's dominant reserve currency.
If it surrenders that role to either one of the country or economic zone or a series of other countries or economic zones, then it loses that power on the geopolitical stage.
Now, we're a long way from that happening right now.
But the fact that this is a conversation that serious people are taking seriously, I would argue it makes this a very important moment.
The people who are going to end up as winners of this are basically lawyers who were busy advising companies on how on earth to cope with these tariffs.
Some bond traders and other very quick -footed hedge fund traders.
Probably some of the people around Trump who may well be dabbling in the markets at the same time as they are engaged in other aspects of poly -advice.
And dare I say it, journalists, because there's going to be a lot of need for people to try and explain what note is happening.
Alright, we are gonna take a quick break.
And when we come back some serious people are going to do a new segment called Out of the Swamp.
And we are back with Out of the Swamp where we ask our guests to recommend stories they're watching outside of Washington.
Katie, why don't you go first.
what's going on outside DC for you.
I'm going to cheat a little bit.
One story that's kind of indirectly linked to what's going on in Washington is, there's a really fun story from my colleague, Leslie Hook in the FT.
There's a facility in Switzerland that melts down gold bars from the standard London size, which is about the size of a brick and reformats them in standard New York size, which is about the size of a smartphone.
so that it can be sent across the Atlantic to meet massive amounts of gold demand, particularly in the States, particularly indirectly linked to Trump.
And it's a really fascinating story about what actually happens in the guts of financial markets.
So a small cheat on my part, but I think you're going to let me off.
I will definitely let you off, especially because that is a wonderful, fun fact to bring up at dinner parties.
I did not know that there were different standard sizes of gold bars.
Yeah, who knew? All right, cool.
Julian, what about you?
What are you looking at?
I would argue it's less fun, but it's very important, is the precious building in the U .K., as you see very weak economic growth.
We just have data suggesting the economy contracted slightly in the past three months, and that really puts pressure on the British government government to work out how on earth they can devise policies to get themselves out of this potentially quite a sacrificial mess, given that they are caught in a very difficult position between America and Europe right now.
All right, well, it's certainly not just the U .S.
that is dealing with a complex set of economic circumstances.
I want to thank our guest, Katie Martin, host of the Unhedged podcast and author of the FT's Long View column.
Thanks, Katie. Pleasure.
And Jillian Tet, longtime FT editor and contributor, and formerly the editor of Moral Money.
Thanks, Jillian. Thank you.
This was Swamp Notes, the US politics show from the FT news briefing.
If you want to sign up for the Swamp Notes newsletter, we've got a link to that in the show notes.
Our show is mixed by Sam G Vinko produced by Katya Kunkova.
Special thanks to Pierre Nicholson.
I'm your host Sonya Hudson.
Our executive producer is Topa Forehaz, and Cheryl Brumley is the FT's Global Head of Audio, original music by Hannahs Brown.
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