(Yahoo!Finance) - President Trump and his aides are closely watching the US dollar's (DX=F) drop over the first six months of this year as they track a change that could have wide-ranging effects, from how tariffs are felt to Federal Reserve policy to America's role in the world.
The question, which notably remains somewhat open even among Trump's aides, is whether the net effects may include at least some positive short-term consequences for the president's agenda or whether the dollar needs to be strengthened at all costs.
Commerce Secretary Howard Lutnick offered a limited case for a weaker dollar on CBS over the weekend when he responded to a question about rising consumer prices by saying that "the dollar declining sort of softens tariffs completely."
The currency's moves so far this year — which have surprised some economists who expected Trump's tariffs to put pressure in the other direction — could indeed boost exports but could also complicate Trump's goals for the coming months, primarily by pushing prices up for US consumers of foreign goods.
Trump himself remains very much in the strong dollar camp, as he reiterated just a few days ago, saying that he is "never going to let the dollar slide." The only way that could happen, he added, is "if you have a dummy" as president.
The somewhat mixed messaging comes as the US dollar index (DX-Y.NYB) — a measure of the US currency against various foreign currencies — has fallen significantly and is now down almost 10% since Inauguration Day.
Declines in recent days have put the currency near two-year lows, as of early Wednesday.
It's a change that, if it sticks, will have varied consequences for Trump's agenda — and not just on the trade front.
RSM's Joe Brusuelas offered in a note this week that a weakening dollar tends to be followed by inflation pressure — "but it usually takes nine to 12 months" — which could work most directly against Trump's keen interest in lower interest rates.
If the dollar holds or declines further, the economist wrote, "such a scenario will most likely lead the Federal Reserve to hold its policy rate steady through the end of the year at best" due to inflation uncertainty.
'People vote with their feet'
The somewhat surprising dollar moves so far this year have also spurred some concerns that recent declines could be early signs of a loss of faith from global investors.
As JPMorgan Chase (JPM) CEO Jamie Dimon put it recently, "people vote with their feet," and "if people decide that the U.S. dollar isn't the place to be ... that will become a problem."
Eurasia Group's Ian Bremmer added in a recent analysis that the dollar's role as the world's global reserve currency is likely safe for now, but the US is entering a period where investment trends "could start a long term slide to become closer to parity in trust and utility with the Euro."
Some analysts are pushing back, saying the evidence isn't there (at least yet) for a long-term slide.
A recent analysis from Monty Gandhi at the SMBC Group called the flows away from the dollar "still more myth than reality" and found that "speculative positioning may reflect short-term bearishness on the dollar, actual capital flows continue to favor U.S. assets."
Another note of skepticism about any long-term effects came from Torsten Sløk, chief economist at Apollo Global Management, who wrote in a note that his expectation is that if the trade uncertainty is resolved, "the US dollar is expected to appreciate again" after what he describes as a rebound in demand for US assets that began in May. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
It's also a narrative that the White House pushes hard against, with Trump taking an aggressive stance against BRICs, an intergovernmental organization comprising 10 countries that had floated a long-shot idea of a common currency.
"They wanted to try and take over the dollar," the president said.
Trump promised a 10% tariff in response and gloated last week that the group's influence is "fading out fast," likening the possible loss of the dollar's status as a reserve currency to "losing a world war."
"Ten-year Treasury yields rallying down since Inauguration Day, four consecutive expectation-beating inflation reports, and the trillions in historic investment commitments that have poured into the United States since Election Day are all indicative of the confidence that investors and markets continue to have in our economy and currency," added White House spokesperson Kush Desai in a statement.
A long-simmering Trump-world debate
This summer's focus on the dollar is just the latest in a debate within Trump's orbit that stretches back even before the 2024 election around whether the dollar is overvalued.
As the Atlantic Council recently put it: "What's the Trump administration's dollar strategy? It depends on who you ask."
On one side historically are figures like Stephen Miran, the chair of Trump's Council of Economic Advisers, who touted the idea of a "Mar-a-Lago accord" last year, before he joined the administration, that was largely built on a premise that the US dollar is "persistently overvalued" and that tariff inflation can be avoided if currency issues are also addressed simultaneously.
His argument was that tackling the currency question alongside tariffs could rebound in America's favor on a variety of fronts — from the national debt to national security arrangements to providing a boost to US businesses.
It was an argument that Lutnick appeared to resurface in part over the weekend.
It's also a line of thinking that has faced clear resistance from other aides (and apparently from Trump himself) who shy away from any public suggestion that the Trump administration is interested in lessening the US dollar's strength.
Treasury Secretary Scott Bessent — a former currency trader himself — has repeatedly downplayed the dropping dollar, saying that "it's natural for currencies to go up and down and what we've seen is not out of the ordinary."
Bessent is often quick to note that the dollar also declined in 2017 — the beginning of Trump's first term — but then rose in the following years. He often casts the moves — as he did on CNBC earlier this month — as better understood as a strengthening of the euro instead of a weakening of the dollar.
So far, at least, Trump's actions have focused on one side of Miran's thesis, the implementation of tariffs, but with much less focus on his corollary currency ideas beyond things like a mention of "currency practices" in his "Liberation Day" tariffs executive order.
It has even led Miran to offer some distance from his own paper and, on possible currency actions, to suggest, "Could it be something that is entertained down the road? Sure."
By Ben Werschkul · Washington Correspondent
