Can President Trump Devalue the US Dollar While Maintaining Its Global Reserve Currency Status?

The recent economic policy discussions surrounding former President Donald Trump’s potential second administration have revived a contentious debate: Can the U.S. dollar be deliberately devalued without jeopardizing its role as the world’s dominant reserve currency? The strategic interplay of tariffs, currency policies, and national security could significantly reshape the global economic landscape, promising advantages for the U.S. economy if managed judiciously.

Historically, President Trump has advocated aggressively reshaping international trade to correct what he perceives as persistent imbalances detrimental to American industry and manufacturing. Central to this imbalance is the long-standing overvaluation of the U.S. dollar, primarily driven by its status as the global reserve currency, creating an inelastic demand that suppresses American competitiveness on the global stage.

Why Devalue the Dollar?

The “Triffin dilemma,” named after economist Robert Triffin, encapsulates the paradox where the country providing the global reserve currency must run persistent trade deficits to supply the necessary currency abroad. This scenario invariably leads to an overvalued currency, negatively impacting domestic manufacturing and export competitiveness. For the U.S., the impact of a persistently strong dollar has been significant, costing millions of manufacturing jobs and exacerbating regional economic inequalities.

Devaluing the dollar, therefore, appears as a solution to reinvigorate American manufacturing, enhance export competitiveness, and correct trade imbalances. By making U.S. exports cheaper internationally and imports relatively more expensive domestically, dollar devaluation could boost economic activity within critical manufacturing sectors and rebalance trade flows.

Tools for Dollar Devaluation

Contrary to some economists’ skepticism, the U.S. has potent tools for unilateral currency adjustment, the most immediate being tariffs. President Trump previously employed tariffs extensively between 2018-2019, notably against China, with surprisingly muted macroeconomic disruptions. These tariffs were effectively counterbalanced by currency depreciation in China, resulting in minimal inflationary pressures domestically. This experience bolsters confidence that tariffs could be deployed strategically once again.

Yet tariffs alone might not achieve sustainable currency adjustments without complementary currency-focused policies. The Trump administration could explore unilateral strategies, such as leveraging the International Emergency Economic Powers Act (IEEPA), to impose user fees on foreign holders of U.S. Treasury securities. This approach could reduce incentives for reserve accumulation, thus decreasing demand for the dollar and encouraging currency depreciation.

Moreover, coordinated multilateral agreements, reminiscent of the Plaza Accord of 1985, could provide smoother adjustments and minimize market volatility. A modern equivalent—hypothetically dubbed a “Mar-a-Lago Accord”—could involve foreign central banks converting short-term Treasury holdings into longer-term bonds, simultaneously stabilizing U.S. debt markets while facilitating controlled dollar depreciation.

Maintaining Reserve Status Amid Devaluation

However, deliberate dollar devaluation raises legitimate concerns about potentially undermining the dollar’s reserve currency status. Maintaining reserve status hinges on preserving the stability, liquidity, market depth, and robust rule of law associated with U.S. financial markets. A carefully managed, transparent, and gradual currency adjustment could mitigate adverse effects, reassuring global markets.

Strategically sequencing tariffs first, and then currency adjustments, could provide negotiating leverage for favorable trade and currency agreements, ensuring foreign partners continue to see value in holding dollars. Gradualism and clear forward guidance on policy direction could further contain market volatility and sustain investor confidence.

Economic Advantages of Devaluation

A carefully executed dollar devaluation strategy offers significant potential economic benefits:

• Enhanced Export Competitiveness: Cheaper exports boost American manufacturing, creating jobs and revitalizing industrial regions.
• Improved Trade Balance: Reducing trade deficits stabilizes external debt accumulation, potentially enhancing fiscal sustainability.
• Revenue Generation via Tariffs: Tariffs provide fiscal revenues, potentially funding other economic reforms or reducing the fiscal deficit.
• Foreign Investment Attraction: A competitively valued currency could attract foreign direct investment, spurring domestic economic growth and innovation.

Moreover, aligning trade policies explicitly with national security interests could compel greater burden-sharing among U.S. allies, reducing America’s disproportionate financial and security commitments globally.

Conclusion: A Viable but Delicate Balance

President Trump’s economic vision—devaluing the U.S. dollar while safeguarding its global reserve currency status—remains ambitious but plausible. Achieving this delicate balance requires meticulous planning, gradual policy implementation, and possibly multilateral cooperation. While risks such as market volatility and potential retaliation exist, the economic advantages of a carefully managed devaluation are significant.

Ultimately, the success of this ambitious restructuring will hinge on clear communication, calculated incremental policy steps, and robust contingency planning. If managed prudently, a targeted currency devaluation strategy could effectively rebalance America’s role in global trade, rejuvenating domestic industry without sacrificing its long-term financial preeminence.