New economic research suggests that the dollar’s status as the world’s reserve currency is secure for now, despite the massive tariffs proposed by President Trump on “Liberation Day” in April.
The research examined how Trump’s massive tariff plans, which began on “Liberation Day” in April, might affect the dollar’s status as a reserve currency.
The USD gives America “exorbitant privilege,” as other countries see U.S. currency as extremely safe. This attracts investment to America and allows the government to borrow at cheaper rates than other nations.
According to the research, this special status depends heavily on open trade that ties other countries’ economies closely to the US economy. When America puts up trade walls, it weakens these connections along with the benefits they bring.
Tariffs threaten dollar’s global strength
The study team included Tarek Hassan from Boston University, Thomas Mertens from the San Francisco Federal Reserve, and Wang from Renmin University of China. They found that tariffs hitting 26% would be a breaking point where other currencies like the Euro could start challenging the USD’s central role in global business.
The current tariff levels under Trump average around 17 percent to 18 percent, the researchers estimate. They say these rates might make the dollar somewhat weaker but probably won’t destroy its dominant position entirely.
“The dollar emerges as the safest currency in the world because shocks that affect the United States move a large share of global demand,” the researchers wrote. This drives need for USD when people want protection against currency swings and other financial risks.
They explained that this safety feature is what keeps United States interest rates low, draws global investment to America, and makes the USD the target for other countries trying to keep their exchange rates stable. “A sustained trade war would threaten this equilibrium,” they warned.
The research came out during this week’s Brookings economic conference. It arrives at a time when people are paying close focus to the dollar’s world role and how Trump’s policies might change it.
Market signals cast doubt on USD’s stability
This week’s New York Fed conference will also examine this issue. Meanwhile, investors are trying to figure out what conflicting economic data might mean for any changes ahead.
Recent USD declines could signal trouble. However, U.S. Treasury yields have fallen and stocks hit record highs, suggesting continued need for dollar-based investments and easing concerns about America losing global financial leadership.
However, the researchers cautioned that this strength can’t be assumed to last forever. They cited last spring’s market decline as an example.
“The fact that U.S. equities, Treasury bonds, and the dollar lost value at a time of disruption for international markets represents a stark departure from the usual pattern in which the dollar appreciates in times of global stress,” they wrote. This referred to the negative reaction when Trump first announced his trade tax plans in April.
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