The Trade War and the falling Dollar: How the Global economy is changing under Trump's policies

In recent economic news, Bloomberg reported that President Donald Trump's tariff threat once again boosted the dollar (DX=F). That short-term boost, however, did not mask investors' bets on a falling dollar trend. With signs of a cooling U.S. economy increasingly apparent and the potential impact of a trade war on the global economic landscape, a growing number of market analysts are starting to worry about the long-term outlook for the dollar.

First, President Trump's tariff policy has undoubtedly provided some support for the dollar in the short term. As a kind of trade barrier, the direct effect of tariff is to increase the cost of imported goods, so as to protect domestic industry from the impact of foreign competitors. In the short term, such a measure could boost domestic employment and production, thereby boosting economic growth and the dollar's exchange rate. The long-term impact of tariffs, however, is far from straightforward.

The implementation of tariff policies is often accompanied by retaliatory measures from trading partners, triggering a trade war. Since the Trump administration took office, its frequent tariff measures have triggered a strong reaction from a number of trading partners, including major economies such as the European Union and China. These countries have taken retaliatory measures such as raising tariffs and restricting imports to protect their own interests. The outbreak of the trade war has not only disrupted the international trade order, but also led to a decrease in global trade volume and a slowdown in economic growth.

In this context, the position of the US dollar as the main settlement currency for international trade is beginning to be challenged. The continued escalation of the trade war has made the global trade environment increasingly complex and uncertain, and investors' confidence in the US dollar has begun to shake. They are starting to worry that as the trade war deepens, the US economy will take a bigger hit, which will drag down the value of the dollar. This fear has gradually spread through the market, forming a bet on a downward trend in the dollar.

In addition, signs that the U.S. economy is cooling also provide more reason for the dollar to fall. In recent years, although the US economy has maintained a certain growth momentum, the growth rate has slowed down significantly. This is mainly due to the constraints of multiple factors such as an aging population, backward infrastructure, and insufficient impetus for innovation. At the same time, US fiscal policy is under enormous pressure. While the Trump administration's tax cuts have spurred economic growth to some extent, they have also led to a sharp expansion of the fiscal deficit. This unsustainable fiscal policy is undoubtedly storing up trouble for future economic growth.

In this case, the Federal Reserve's monetary policy also looks stretched. In response to slowing growth and inflationary pressures, the Fed has had to take measures such as cutting interest rates to stimulate the economy. However, rate cuts, while they can lower borrowing costs for businesses and individuals, can also reduce the attractiveness of the dollar. Because rate cuts mean lower returns on dollar assets, investors are likely to switch to other currency assets with higher returns. This outflow of capital will undoubtedly exacerbate the dollar's downward trend.

In addition to the above factors, the impact of the trade war on the global supply chain cannot be ignored. The ongoing escalation of the trade war has made global supply chains increasingly vulnerable and unstable. Many companies have to adjust their production layout and supply chain structure in order to avoid the risk of tariffs. This adjustment not only increases the operating costs of enterprises, but also reduces the efficiency and stability of the global supply chain. In this case, the liquidity of the US dollar, as the main settlement currency for international trade, may be restricted to a certain extent, further weakening its position.

In addition, the diversification trend of the global economy has also weakened the hegemony of the US dollar to a certain extent. In recent years, with the rise of emerging markets and the diversified development of the global economy, more and more countries began to seek diversified currency settlement methods. Instead of relying solely on the US dollar to settle international trade, these countries have begun to adopt other currencies or set up their own payment systems. This diversification has certainly created additional challenges for the dollar's long-term outlook.

In summary, while President Trump's tariff threat has boosted the dollar's exchange rate in the short term, it has set the stage for the dollar's decline in the long term. As signs of a cooling U.S. economy become clearer and the potential impact of a trade war on the global economic landscape, investor confidence in the dollar has begun to falter. They began to bet on a downward trend in the dollar and sought other, more attractive currency assets to avoid risk. In this context, the US dollar's status as the world's leading reserve currency is beginning to be challenged. In the future, as the global economy further diversifies and the trade war continues to escalate, the outlook for the dollar will be more uncertain.

As investors and policymakers, we need to pay close attention to these economic developments and adjust accordingly. Investors should be vigilant and allocate assets reasonably to deal with potential risks. Policymakers need to strengthen international cooperation to maintain the global trade order and financial market stability. Only in this way can we maintain sustained and healthy economic development in the tide of globalization.