In 2022, the dollar reached its highest level since the early 2000s after experiencing a decade of sustained growth. As of August 2024, the dollar has been trending downward. Still, the dollar has appreciated against most major currencies in 2024. The US dollar has stayed stronger than the rest of the world for a number of factors, not the least of which is that the Fed has kept interest rates elevated while some other global central banks have been moving in the other direction. The power projection of the United States is greater when the US dollar is strong, and as the US dollar becomes weaker, it's less capable of projecting political power. But on the other hand, more American workers are employed. The people who benefit from the strong dollar are usually different people than would benefit from the weak dollar. A strong dollar may reflect economic strength, but it can have downsides for American consumers. The strong dollar tends to help consumers because it gives them more purchasing power, but it

also means, generally speaking, that prices are going to be higher at home. So, there's a balance there. And striking that balance is a really difficult thing. The US president doesn't always want a strong dollar. As a result of that, presidents have taken direct actions that led to the significant devaluation of the dollar. We've been hurt, in my opinion, very badly by our own Federal Reserve, who has also created a very strong dollar. That's something nice about a strong dollar, but it makes it much harder to do business outside of this country. Here's what a strong or weak dollar means for American consumers, and how that could impact a president's economic agenda. The dollar's value depends on economic conditions in the US and around the world, so it's difficult to label a strong dollar as simply good or bad. Overall, I actually don't like the word strength because that has positive connotations. And really what we just mean is that it's more expensive relative to where it was before.

So dollars can buy more foreign things than it was before. If you're somebody who likes to vacation a lot, you go overseas. If you have a strong dollar, you get a very favorable exchange rate, and you can buy more stuff. But a strong dollar can also have its downsides. It's less good if you want to sell things to people who have those currencies because it means that everything you're selling is more expensive. It's possible demand for U.S. goods abroad would decrease if international consumers couldn't afford to buy those goods. American workers could then be negatively impacted. A strong dollar is generally bad for growth and can lead to layoffs, particularly in manufacturing, which is heavily exposed to global trade. And you can see empirically in the US in particular these big declines in manufacturing employment when the dollar appreciates a lot. You saw this in the early 80s. You saw it in the early 2000s.

Usually, a very weak economy boosts your exports because what you're trying to sell to the rest of the world is cheaper. So, in that way, a weak currency can benefit on the trade side and actually help a country earn some hard currency from somewhere else. But it also means importing is very expensive because your currency doesn't buy much. The dollar really started to appreciate when we started to see the first flare-up of inflation. It began back in 2021. It really accelerated in 2022, and the Fed had to step in and start raising interest rates to control inflation, and that in turn had an upward pressure on the dollar. And it has stayed pretty consistent since then. There's volatility. There always will be volatility with the dollar. But it was pretty much with the ascent of inflation where we really saw that pronounced move higher. The Federal Reserve began raising interest rates in March 2022 in an attempt to slow down the economy and

lower inflation. But as of August 2024, the dollar index has been moving downward as investors anticipate rate cuts. That the Fed, as it raises interest rates, makes the dollar a more attractive investment vehicle around the world. So it's going to raise the value of the dollar when you get that nice risk-free investment that you can just buy dollars or dollar-equivalent type of investments, that you get a very nice return on them. And that's not been the case for a long time. So higher interest rates do tend to push up the value of cash and cash equivalents for investors. On top of that, tariffs on imported goods can influence the dollar's value. The dollar is the world's dominant currency. It's used by an overwhelming number of nations and companies as the way to pay for the transfer of goods and services in an increasingly dominant world trading system. The dollar is used as a benchmark for other nations to conduct

their foreign exchange policies, notably China. Imposing tariffs on imports or negotiating trade deals can influence the balance of trade, which affects the demand for and value of the dollar. During his time in office, former President Trump implemented tariff policies against Chinese imports with the stated goal of addressing trade imbalances and protecting specific American industries. President Biden also implemented tariffs on $18 billion worth of Chinese imports. Many experts believe those tariffs worsened the U.S. trade deficit, which may have contributed to the appreciation of the dollar. If you have big imbalances in trade across countries, then that is destabilizing. It could actually be the case that tariffs make the currency go up. The textbook answer is that tariffs hurt your exporters because your currency appreciates, and then they're less competitive in foreign markets. The tendency is to think that you can preserve American jobs by putting on high levels of tariffs. But the high levels of tariff will make imported goods also more

expensive for American producers who are using those goods in the products that they themselves make. And this was the case with the Trump tariffs on steel and aluminum. We've now got some quite good empirical studies of this. It didn't create very many new jobs in steel and aluminum production, but it did increase the cost of steel and aluminum for American manufacturers and made them, as a result, less competitive. But often presidents have been upset about the particular policy that the Fed is conducting. Trump is no exception. The Federal Reserve is a very interesting thing, and it's sort of gotten it wrong a lot. And he's tending to be a little bit late on things. He gets a little bit too early and a little bit too late. I feel a president should have at least say in there. Yeah. From a practical perspective, officials, presidents, Federal Reserve chairs, those kind of things. They try to stay out of the way of the dollar.

They try to traditionally not move the dollar one way or another because it does cut both ways. And it's a very difficult thing to do. So it has been a tradition that top-level policymakers do stay away from that. Of course, Trump is the exception to a lot of rules, and that's one of them that he was more vocal about the way he wanted the dollar to go. Senator JD Vance, former President Trump's 2024 running mate, has also expressed concern about the impact of the strength of the dollar. In some ways, you can argue that the reserve currency status is a massive subsidy to American consumers but a massive tax on American producers. President Biden dismissed concerns about the strong dollar in October 2022. I'm not concerned about the strength of the dollar. I'm concerned about the rest of the world. Democratic presidential nominee Vice President Kamala Harris has not commented about the strength of the dollar. The Biden administration, as well as the Harris and Trump campaigns, did not respond to CNBC's

request for comment in time for publication. Presidents in the past have taken direct actions that led to the depreciation of the dollar, such as President Richard Nixon when he suspended the gold standard in August 1971, or when President Ronald Reagan put together a coordinated effort with other global economies to depreciate the value of the dollar in 1985. The best way of managing the decline of the dollar was by this internationally agreed operation. If you try to do it unilaterally, you get much more in the way of weird consequences. Unintended consequences. Nixon's decision to close the gold window was indeed taken unilaterally. There was no need to consult Congress. Nixon promised, when he made this decision, that it wouldn't have any effect on American prices, and that was absolutely untrue. Prices rose, and the 1970s was the period that some economic historians consider as the great inflation in the United States.

But the other thing that really affects what the level of the dollar will be is what the fiscal position of the United States is. That's a decision that then depends on Congress, and it's going to be obviously something that can't be done by the president just by saying this. He can't say we're going to have a big tax increase or we're going to get a tax reduction. But he's got a bully pulpit, and he would be in a good position to do this. The idea would be if the president has some kind of congressional leverage, he's going to push through, or she is going to push through the agenda that they want to push through. As the US grapples with the latest bout of inflation, policymakers at the Fed, White House, and in Congress will have to consider the long-term implications of the dollar's future stability. We tend to think that nothing could ever dislodge the dollar from this pre-eminent

status as the world's currency, and I think that that view is overblown and ultimately will be challenged. One possibility is getting rid of the US dollar altogether and replacing it by cryptocurrencies. I think if they put that forward very, very clearly as a campaign proposal, it would produce horror. The world's reserve currency, which the US dollar is, usually has an independent central bank. It has a strong, usually military backing to provide that security, and it has a deep and liquid bond market that foreign investors can invest in. When we've seen concerns about events in the global economy, whether it's the economy or geopolitical events, the dollar has gone up, not down. It's seen as a safe haven. So you'd really, in order to see something change there, we really need a drastic set of circumstances. Is the global reserve currency issue something to worry about in the next six months? The next year? The next two years?

No, but it's something to be keeping an eye on further out into the future.

How A Weakening Dollar Can Help American Consumers

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