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The U.S. Dollar Is Falling Despite Trump’s Trade War Threats

Alright, Tiger—something major is happening. Despite Donald Trump's threats of a global trade war, the U.S. dollar isn't strengthening. In fact, the opposite is occurring—its value is plummeting. This should come as a shock to many, even Wall Street, which has turned bearish on the dollar's future.

The Risk of Losing Safe Haven Status

Deutsche Bank has identified a serious risk of the U.S. dollar losing its "safe haven" status. The world is shifting towards a new geopolitical order, and this headline is one of the most ominous yet. The speed and scale of these global changes make this a real possibility, and we need to acknowledge the reality—losing its safe haven status would be a major blow to the U.S. economy.

The Traditional Safe Haven Playbook Is No Longer Working

The old playbook was simple: in times of crisis—whether war, financial collapse, or banking turmoil—investors would sell their local currencies and flock to the U.S. dollar as a safe haven. But that's no longer the case. Since Trump took office, the dollar has been on a downward spiral, crashing to its lowest level since November. In other words, the dollar has lost value against global currencies.

The Impact of a Weaker Dollar on the U.S. Economy

This is bad news for an economy that relies on a strong dollar, especially during a period of rebuilding. A weaker dollar drives up import costs, and since the U.S. produces little domestically, most consumer goods are imported—from countries like Canada, Mexico, and China. The U.S. runs a massive trade deficit, importing far more than it exports. Just with China, the dependency has reached nearly $300 billion in 2024, and with Mexico and Vietnam combined, it's another $300 billion. Until the U.S. rebuilds its industrial base, a stronger dollar is crucial to offset import costs.

A Weak Dollar Makes Inflation Worse

A weaker dollar also worsens inflation, which Americans are already struggling with. For over two years, the Federal Reserve has reassured the public that inflation is under control. Jerome Powell has insisted that higher interest rates would bring inflation down to 2%, but the reality tells a different story. Since last August, inflation has either stagnated or rebounded. Whether looking at headline inflation or core inflation (which excludes food and energy), prices continue to rise. Even within the U.S., the dollar's purchasing power is shrinking—grocery store prices keep climbing.

Could Trump’s Policies Further Tank the Dollar?

Taking a step back, Trump's policies could actually push the dollar even lower. If his economic strategy continues on its current trajectory, the dollar’s decline could accelerate, further destabilizing the U.S. economy.

Why The Dollar Is Collapsing

The Tariff War and Expectations for the U.S. Dollar

When the tariff war began, the general expectation was that the U.S. dollar would rise significantly. This reasoning made sense—when tariffs are imposed on a country’s goods, their exports to the U.S. decline or even collapse. Exporters lose business, and their revenue drops.

The Impact of Reciprocal Tariffs: A Look at South Korea

Take Trump’s reciprocal tariffs, for example. Looking specifically at South Korea, U.S. tariffs on Korean goods are currently below 2%, while Korean tariffs on U.S. goods are nearly 14%. If Trump proceeds with his plan to match tariffs, the U.S. would raise its tariff rate to the same level. This would make Korean goods much more expensive for American importers, who might simply reduce or stop purchasing these products altogether. As a result, fewer U.S. dollars would flow to Korea.

A Global Dollar Shortage vs. Economic Collapse

If this pattern repeats across the global economy, the supply of U.S. dollars would shrink significantly, which—under normal circumstances—would push the dollar’s value higher. However, markets are worried about something even worse than a dollar shortage: the possibility of the entire U.S. economy collapsing due to the trade war and Trump’s unpredictable policies.

A Grim Economic Forecast from the Federal Reserve

Recent reports from the U.S. Federal Reserve have raised alarm bells. The Atlanta Fed is now projecting a negative 2.4% GDP growth for Q1, a sharp decline from the positive 2.3% growth in Q4. While this drop may seem extreme, it aligns with concerns that Trump’s policies are steering the U.S. toward a recession.

The U.S. Treasury’s Warning: Economic Consumption is Slowing

Scott Besson, a top U.S. Treasury official, recently confirmed on live television that U.S. consumption is on the decline. He highlighted that the top 10% of Americans account for 40-50% of total consumption, an imbalance that is unsustainable. Meanwhile, the bottom 50% of working Americans are struggling financially.

The Three Key Takeaways from Besson’s Statement

Besson made three critical points:

1. Interest rates need to fall significantly.

2. Public spending is set to decline. This suggests the U.S. government may not continue running massive deficits. With major corporations like Doge cutting jobs, economic activity could slow down even further.

3. A painful economic “detox” period is coming. The economy has become dependent on government spending, and reducing it could lead to a difficult adjustment period.

A Clear Warning of Recession

If this isn’t a clear warning sign of an impending U.S. recession, then what is? We are witnessing a dramatic shift in the economy, and the road ahead looks increasingly uncertain.

Huge Retaliation Fear

The U.S. Moves to Penalize Global Trade

The United States appears to be taking a hardline stance against the world, potentially imposing tariffs of 10%, 20%, or even 30% on exports to the U.S. Normally, in such a scenario, the U.S. dollar would rise as a safe-haven asset. However, the opposite is happening—the dollar is falling.

Importers Scramble to Stock Up Before Tariffs Hit

A major reason for this decline is that U.S. importers are rushing to buy foreign goods ahead of impending tariffs. In January alone, the value of U.S. imports surged by 10%, as companies stockpiled products from key trade partners like Mexico, Canada, and China. This panic buying has driven the U.S. trade deficit to an astonishing $130 billion in a single month.

How the Surge in Imports Weakens the Dollar

When U.S. businesses buy more foreign goods, they flood the global economy with U.S. dollars, increasing the supply of the currency and weakening its value. As Trump escalates his tariff threats, importers are expected to further accelerate their purchases in February and March, putting additional downward pressure on the dollar. This means the dollar’s decline may not be over yet.

The Inflationary Impact of Trump’s Trade War

Trump’s aggressive trade policies are highly inflationary, which could severely impact American consumers and damage the largest driver of U.S. GDP—consumer spending. Even beyond consumer impacts, businesses are feeling the strain.

Uncertainty at Unprecedented Levels

The uncertainty surrounding trade policy is now at its highest level in modern U.S. history, surpassing even the levels seen during the COVID-19 pandemic lockdowns in 2020. Companies that fear economic instability hesitate to invest or hire, slowing down both economic expansion and job creation. Reduced investment and hiring weaken the overall economy, making the U.S. a less attractive place for global capital.

Global Retaliation: Trade War Escalates

Trump’s tariffs aren’t just causing domestic turmoil; they are infuriating U.S. trading partners, triggering countermeasures. Countries like Canada are hitting back hard, not just with tariffs on U.S. goods but also on critical energy supplies heading into the U.S.

For instance, a Canadian official recently announced a 25% tariff on electricity supplied to 1.5 million homes and businesses in the U.S., effective Monday, unless Trump reverses his tariffs. This means electricity prices in the Upper Midwest, Northeast, and beyond could surge, adding another inflationary burden on American consumers.

A Supply Chain Crisis in the Making

Retaliatory measures could extend to gas prices and auto manufacturing, causing widespread disruptions. Auto parts cross U.S.-Canada borders up to eight times before final assembly, and if the trade war escalates, factories could shut down within days due to supply chain disruptions.

A Global Shift Away from U.S. Investments

The U.S. economy is now facing severe headwinds from both internal and external forces. Even if Trump manages to reduce the U.S. trade deficit, the economy may still slide into recession.

Investors worldwide are highly pragmatic, and the U.S. is no longer the only game in town. Growth and innovation can now be found in other global markets, particularly in China. As a result, capital is flowing out of U.S. assets, further contributing to the U.S. dollar’s decline. Looking eastward, we can already see where global capital is beginning to shift.

The U.S. Moves to Penalize Global Trade

The United States appears to be taking a hardline stance against the world, potentially imposing tariffs of 10%, 20%, or even 30% on exports to the U.S. Normally, in such a scenario, the U.S. dollar would rise as a safe-haven asset. However, the opposite is happening—the dollar is falling.

Importers Scramble to Stock Up Before Tariffs Hit

A major reason for this decline is that U.S. importers are rushing to buy foreign goods ahead of impending tariffs. In January alone, the value of U.S. imports surged by 10%, as companies stockpiled products from key trade partners like Mexico, Canada, and China. This panic buying has driven the U.S. trade deficit to an astonishing $130 billion in a single month.

How the Surge in Imports Weakens the Dollar

When U.S. businesses buy more foreign goods, they flood the global economy with U.S. dollars, increasing the supply of the currency and weakening its value. As Trump escalates his tariff threats, importers are expected to further accelerate their purchases in February and March, putting additional downward pressure on the dollar. This means the dollar’s decline may not be over yet.

The Inflationary Impact of Trump’s Trade War

Trump’s aggressive trade policies are highly inflationary, which could severely impact American consumers and damage the largest driver of U.S. GDP—consumer spending. Even beyond consumer impacts, businesses are feeling the strain.

Money Is Leaving The U.S.

A Narrative Shift: From Prosperity to Struggle

Under the Trump administration, the U.S. has seen a dramatic shift—from what was once considered a "Golden Age" to a harsh new reality of economic uncertainty. Even Trump himself has acknowledged that things could take a turn for the worse. Meanwhile, Scott Besson has confirmed that there won’t be a “Trump-hood”—meaning the Treasury will not step in to rescue the stock market in the event of a collapse.

The Role of Government Spending in Market Growth

For the past three years, U.S. asset prices have been driven by massive government spending. Running deficits at 6.7% of GDP created a rising tide that lifted all markets, with the biggest beneficiary being the U.S. stock market. Trillions of dollars poured into the S&P 500, pushing the index above 6,000 points. However, that trend is now reversing.

Stock Market Decline and Its Impact on the Dollar

U.S. stocks have plunged more than 5% in just a few weeks, and with Trump now focused on cutting deficits, investors are growing increasingly concerned. The U.S. economy and stock market have been the biggest drivers of global investment demand for the dollar. As stocks continue to fall, the incentive for foreign investors to hold U.S. dollars weakens, further accelerating its decline. If this downward momentum intensifies, the dollar could crash as well.

The Tariff War: A Potential Catalyst for Further Decline

This brings us to the tariff war, which could further accelerate the outflow of money from the U.S. dollar. Trump has repeatedly emphasized tariffs as a cornerstone of his trade policy, with "reciprocal" tariffs being another key focus.

The Global Trade Showdown Begins April 2nd

On April 2nd, Trump plans to single out trade partners, highlighting which countries are "good actors" and which are "bad actors" based on their trade policies. He will pressure foreign governments to remove trade barriers that have allegedly harmed American workers. The message is clear: trading partners will have a choice—either open up their markets and reduce trade manipulation, or face heavy tariffs from the U.S.

If tariffs are imposed on a large scale, this could escalate global trade tensions, further destabilizing markets and driving capital away from the U.S. economy.

The Surprising Winner

Declining U.S. Dollar Demand and the Shift to China

If global capital isn’t flowing into the U.S., demand for the dollar naturally decreases. A clear example of this divergence is seen in the performance of U.S. and Chinese technology stocks. While the "Magnificent 7" collapsed by over 10%, China’s mega-cap tech sector surged by more than 40%, adding over $430 billion in investment.

Investors Moving from U.S. to Chinese Assets

This shift shows that many investors sold their U.S. tech holdings to buy Chinese stocks, further contributing to the dollar’s decline. As China advances in AI, semiconductors, and technology, it could continue to divert investment away from the U.S., exacerbating the pressure on the dollar.

China’s Economic Strategy Poses a Challenge to the U.S.

The situation is becoming even more urgent as China boosts domestic consumption and commits to further economic stimulus. During the National People's Congress, the Chinese government pledged additional financial support to protect its economy from global economic shifts. This strengthens China's position and puts even more pressure on U.S. economic growth and the dollar's stability.

The U.S. May Eventually Need a Weaker Dollar—But Not Like This

Ironically, the U.S. may ultimately need a weaker dollar if Trump intends to increase exports—a strategy that would require devaluing the currency. However, the current decline in the dollar is not a planned economic policy, nor is it the result of a coordinated agreement like a modern-day Plaza Accord 2.0. Instead, it's a sign that the global economy is losing confidence in the U.S., and Trump's policies are only accelerating the downturn.

What’s Next for the U.S. Dollar?

With the economy teetering on the edge of recession, the key question remains: Will the dollar continue to weaken? And are we heading toward a full-blown U.S. recession in 2025? Let me know your thoughts in the comments below!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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