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Dow Jones NewsMay 22, 9:02 PM UTC
MW The dollar is struggling to rebound since 'liberation day.' Why it may keep falling.
By Christine Idzelis
There's a 'good chance' the Trump administration will 'get its wish for a weaker currency,' says TS Lombard's Dario Perkins
The U.S. dollar has struggled to rebound since President Donald Trump announced his "liberation day" tariffs in early April, with some analysts expecting that the greenback's decline isn't over even if its status as the world's reserve currency appears safe for now.
"Tariff worries, recession risk and U.S. fiscal-policy concerns are weighing down markets," strategists at BofA Global Research said in note Thursday on rates and currencies. These worries may lead to a "summer of anxiety," with the "overvalued" U.S. dollar likely continuing to broadly soften against other widely traded currencies, they said.
While the S&P 500 SPX has recovered since Trump shocked markets with large and sweeping tariffs on April 2, the greenback has remained under pressure, the note said. The ICE U.S. Dollar Index DXY, a measure of the greenback against six other major currencies, has fallen almost 4% since those "liberation day" tariffs were rolled out, according to FactSet data.
Although the dollar has "found some reprieve" from the temporary tariff agreement that the U.S. and China struck earlier this month for a period of 90 days, the BofA strategists are "bearish" over the medium term as levies at current levels should still lead to higher prices and slower economic activity, according to the note. The strategists also raised concern over "prospects of unsustainable U.S. fiscal policy."
The dollar is decaying as "geopolitical allegiances, trading patterns and investment incentives shift," said Dario Perkins, an economist at TS Lombard, in a research note Thursday.
According to his note, currencies' reserve status have historically lasted a century.
"Officially, dollar dominance started in Bretton Woods, New Hampshire, in 1944, when 44 countries agreed a set of new rules for the postwar international monetary system," Perkins wrote. "Under the Bretton Woods system, everyone fixed their exchange rates to the dollar, and the dollar itself was pegged to gold."
Although "the formal Bretton Woods system collapsed because the link to gold ultimately became untenable," with President Richard Nixon severing the dollar from gold in 1971, the chaotic episode did not stop the dollar from "taking over the international monetary system," according to Perkins.
"The world has always been envious of America's reserve-asset status," he said. "Because the international financial system needs the dollar, the U.S. is less likely to experience a 'sudden stop' to foreign investment or a balance of payments crisis," he said, noting that "there is often a scramble for 'safe' dollar assets during times of stress."
But the Trump administration seems to see the dollar's status as a burden, according to Perkins.
"Not everyone sees reserve-asset status as a blessing, including prominent members of the Trump administration, who claim that the world's structural bid for USD delivers a permanently overvalued exchange rate, hollowing out American manufacturing and forcing the country to run perpetual deficits," Perkins wrote. "For the most part, the administration's thinking is flawed, rooted in a fundamental misunderstanding of how dollar hegemony works."
To the thinking of Perkins, nothing in the system "forces" the U.S. to run deficits and he sees "no reason the dollar cannot depreciate - perhaps significantly - even if America retains its dominant position."
In his view, "there is a good chance the administration will get its wish for a weaker currency, precisely because it is doing things that will damage the U.S. economy while simultaneously forcing the rest of the world to get its act together."
That said, the dollar is not about to lose its reserve-currency status, according to Perkins.
"For now, investors just need to know that the era of U.S. exceptionalism is over, and the dollar exchange rate is headed lower," he said. "The U.S. has chosen this path even if there is no clear evidence of an 'exorbitant burden.'"
-Christine Idzelis
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05-22-25 1702ET
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