Every “logical” explanation that has been applied to US President Donald Trump’s inarticulate behavior over the years has been found to be inadequate.
The greenback’s effective depreciation on the trade side and its continued stability on the financial side are unlikely to last forever, at which time the US economy may be forced into a painful rebalancing. But until that time, non-U.S. economies should not assume that a weaker dollar will produce the usual relief.
By 2025, the dollar index, which measures the strength of the greenback against a basket of major currencies, has fallen about 9.4%. During the same period, the average effective U.S. tariff rate increased about 14.4 percent, from 2.4 percent to 16.8 percent, according to the Yale Budget Lab. Taken together, these changes imply that, in the area of import trade, the United States experienced an effective exchange rate depreciation of approximately 24 percent.
Such a scenario is politically attractive to the United States because it protects manufacturing competitiveness and generates additional tariff revenue, while the dollar remains relatively stable. This stability, in turn, helps support the prices of U.S. Treasuries and other dollar assets, reducing the risk of a vicious cycle of general depreciation, unmoored inflation, capital outflows, and financial market stress.
But the “mirror” balance of payments remains. As long as the dollar is the global reserve currency of choice, persistent net capital inflows into the United States – which necessarily correspond to America’s current account deficit – are unlikely to disappear, making structural imbalances difficult to resolve. In fact, this dynamic may generate additional costs, which will likely fall disproportionately on non-U.S. economies, particularly emerging markets.
Historically, the dollar has weakened when the U.S. Federal Reserve eases monetary policy, U.S. long-term yields decline, and global investors’ risk appetite improves – conditions that ease international financing constraints and increase offshore dollar liquidity. But this time around, the dividend of a weak dollar can be heavily discounted, as tariffs act as a moat that “pre-regulates” relative prices in international trade, reducing the nominal exchange rate depreciation required for external rebalancing.
This change has three consequences for the rest of the world. First, trade and investment slow together, weakening the microfoundations of dollar liquidity spillovers. US President Donald Trump’s reciprocal tariffs have led to growth in global trade in goods. And when trade flows, corporate demand for dollar-denominated trade finance and supply chain credit declines, and cross-border dollar creation slows accordingly.
Separately, in October 2025, UNCTAD noted that global foreign direct investment remained weak – down 3% in the first half of 2025 – and that continued tariff uncertainty pushed investors to adopt a wait-and-see stance. This implies that even if the greenback weakens in nominal terms, the periphery may receive dollar liquidity less efficiently than it does in a typical depreciation cycle.
Second, tariff-induced price pressures raise inflation expectations and amplify political uncertainty in the United States, which may hamper the decline in long-term yields and the forward premium, which in turn hampers the decline in global interest rates for risk-free assets. Increased uncertainty can also increase risk premiums around the world, reducing the spillover effects of a weaker dollar, including higher risk appetite and renewed capital inflows into emerging markets.
To be clear, the effective exchange rate depreciation of around 24% reflects the relative price distortion on the trade side; it does not suggest that import prices mechanically increase by this amount. Even so, its effects on inflation and monetary policy may appear with a lag and become more visible in 2026. The International Monetary Fund finds that the transmission of tariffs to prices has so far been relatively slight, but that the effects could be delayed. At the same time, he stressed that higher tariffs and uncertainty complicate the trade-offs faced by central bankers.
Third, emerging markets will grapple with asymmetric shocks and shrinking policy space. As I have previously argued, “reciprocal” tariffs will widen the North-South divide, as lower-income countries are often hit with higher rates. In this situation, weak exports and lower capital inflows more easily lead to slower growth and currency depreciation – a trap that policymakers struggle to escape.
Currency depreciation can trigger imported inflation or increase the dollar-denominated debt burden, putting central bankers in the difficult position of balancing interest rate differentials, exchange rate stability and foreign exchange intervention. This means that financial conditions may not improve as much as might be expected in a weaker dollar environment.
In short, this is not just another round of protectionism. Instead, adjustment pressures have been reallocated: For the U.S. economy, the trade side receives “effective” depreciation through the tariff wedge, while the financial side seeks stability. Whether such an arrangement can persist depends on four conditions.
First, price advantages must translate into real gains in additional capacity and productivity, rather than remaining a temporary redistribution of rents. Second, inflation must be contained. If tariffs entrench core inflation over time, the Fed will have much less room to maneuver, and forward premiums could rise, undermining the financial stability the strategy is designed to preserve.
Third, non-US economies must continue to comply; otherwise, increased retaliatory action would eat into America’s trade gains and create more uncertainty. Fourth, the world must continue to believe that U.S. debt is a safe asset. If forward premiums continue to rise amid growing concerns about America’s fiscal sustainability, the “relative stability” of the financial side will weaken and could spill over into the real economy.
If any of these conditions are not met—if reshoring fails to deliver, inflation proves sticky, or external retaliation intensifies—the dollar’s effective depreciation on the trade side and its continued stability on the financial side may begin to work against each other, forcing the U.S. economy into a painful rebalancing. But until then, non-US economies should not assume that a weaker greenback will produce the usual relief. We may be entering a tariff-era version of what then-U.S. Treasury Secretary John Connally described in 1971 as “our currency, your problem.”
Qiyuan Xu
Senior researcher at the Chinese Academy of Social Sciences, is the author of numerous books, including Reshaping the Global Industrial Chain: China’s Choices. His research focuses on China’s macroeconomics, U.S.-China trade relations, international monetary system reforms, and global supply chain dynamics.
Source : Mali Tribune
date: 2026-02-07 22:51:00
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