US exceptionalism turns dollar into global problem

King Dollar, meet the Donald. After lording over most major currencies for the past three years, the greenback is likely to get another big boost from the protectionism and fiscal largesse of incoming US President Donald Trump. It may catch markets and governments out.

This year was supposed to mark the end of the dollar’s long bull run. After the greenback gained 15 percent against its developed world peers since January 2022, analysts predicted that a slowdown in the US economy along with interest rate cuts would dethrone it. Not so fast. Since the start of 2025, the dollar index, which tracks the US currency against a trade-weighted basket of six major currencies, has kept rising. On Jan. 13 it hit the highest level since November 2022.

It could go higher. If Trump keeps his promise to impose widespread tariffs, the price of imported goods would rise and keep U.S. inflation elevated. That, in turn, could prompt the Fed to stop cutting rates, or even to raise them. And if the new administration pushes through a near $8 trillion package of tax cuts, the currency would likely receive a twin boost from faster economic growth and the higher bond yields caused by investor fears of ballooning debt levels.

Admittedly, domestic politics and international diplomacy may derail or dilute the White House’s plans. But markets don’t seem prepared if Trump has his way. Analysts expect the euro to strengthen against the dollar in 2025, according to a Reuters poll. And the International Monetary Fund predicts the US economy will slow down this year, while growth in the euro zone, the UK and Japan picks up. As for import levies, only a third of those betting in the crypto-based prediction market Polymarket believe Trump will impose large tariffs in the next six months.

If that received wisdom is wrong, traders, governments and companies are in for a rough ride. For a start, when the dollar rises global trade shrinks, according to research by American University’s Valentina Bruno and Hyun Song Shin of the Bank for International Settlements. That’s because non-U.S. companies pay more to access the dollars they need to exchange goods and services.

Diverging monetary policies can also cause problems. Traders expect euro zone rates to be 2 percentage points lower than in the United States in December, according to derivatives prices collected by LSEG. That heralds a weaker euro, which may boost Europe’s exports. But that’s not what markets expect.

Countries with big external deficits, like Britain and New Zealand, might also feel unloved by foreign investors who flee towards the greater safety and higher returns of the greenback. The current turmoil in UK government bonds, and the 2.4 percent fall in the pound against the dollar since January, highlight such risks.

Asia could be the region that suffers the most under King Dollar’s rule. Many countries run large trade surpluses with the United States, making them particularly vulnerable to tariffs and geopolitical strife.

Just look at China, where the yuan recently hit a 16-month low against the greenback, prompting Beijing to launch yet more measures to prop it up. Despite those moves, the dollar has risen nearly 3 percent against the yuan in the past three months.

To be sure, Trump and his Vice President JD Vance have, at times, railed against a strong dollar. And before being picked as U.S. Treasury Secretary, Scott Bessent said that the tariff threat was a “maximalism negotiating position” to force other countries to revalue their currencies.

But the new White House’s policy priorities seem stacked against a weakening of the currency. Until that changes, King Dollar will prove to be a ruthless ruler for the rest of the world.