Here's Why a Weaker Dollar Matters
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Bloomberg Audio Studios. Podcasts. Radio. News. I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. I think on the long term, it is important that we have a strong dollar. The dollar is the reserve currency of the world and a strong dollar reflects a strong economy. In the short term, particularly because of trade,

These days, everyone has an opinion on the dollar. That's former US Treasury Secretary Steven Mnuchin speaking to Bloomberg recently. The dollar is a key part of America's economic strength that underpins global finance and trade.

But since Donald Trump unleashed his global trade war, there are cracks in the greenback's image. Bloomberg's dollar index, which measures its strength against 10 leading global currencies, has had its worst start to the year since it was created in 2005. I think there's one thing where there's a sea change.

This isn't just a big deal for the US. The dollar's central role in the global economy means the consequences are felt just about everywhere.

So, here's why a weaker dollar matters for the world. Our resident dollar expert, Salah Mohsen, is back with us to explain. Salah, you are our senior Washington correspondent, but also author of the book Paper Soldiers, How the Weaponization of the Dollar Changed the World Order. Great to have you back with us. Can you put in context the drop that we've seen in the dollar this year for us?

It's a huge drop and it's self-inflicted. It wasn't because there was an attack on the country or that there was an economic collapse. It was because the president imposed economic and fiscal policy that has shocked the world. Traders weren't ready for it, investors, foreign allies, and also puts future growth into uncertainty.

The other reason the drop is interesting is because usually the economic theory predicts that if tariffs are announced, you would think that the dollar would actually trend higher and stronger because it is a safe haven. And so everyone would think, oh, there is uncertainty. There is risk coming down the pike. Let's go to the safest asset in the world. But actually, there was a flight of capital from the U.S. and U.S.-based assets, and that included the dollar.

So who are the big winners and losers then from a weaker dollar? Foreign tourists coming into the country are benefiting from this because their foreign currencies are able to get more for their buck. Of course, we have other considerations that are damaging tourism to America, like some of the visa and travel and U.S. citizenship issues.

But for American consumers or Americans traveling abroad, that means that their dollar stretches not quite as far as it used to. So if you are in Europe, your burger at McDonald's is going to cost more than it used to because your dollar is weaker.

It is somewhat good, you would think, in theory for American manufacturers because they're able to export more goods because foreign countries can purchase more, afford more American goods. But the tensions, the geopolitical tensions, the economic ties between trade partners and allies have become strained from Donald Trump's

manner and methods and applying these tariffs. And so there isn't that much political will to purchase from the United States. What about for companies elsewhere in the world that might be considering, I suppose, broader impacts on their businesses, like, for example, here in Europe?

right now is that there's so much uncertainty it's really unclear exactly how this is going to impact economic growth now a lot of predictions are out there of a recession in the United States for one or two quarters. It depends on how some of these trade deals shake out and so the uncertainty is making it hard for all businesses to make plans for the future including European businesses.

Also, the supply chain shock is really sinking in for people. It's confusing to know when the tariffs will be applied, which tariffs will really hold once this 90-day pause and all the trade deals have been struck. So businesses are scrambling and either trying to get goods in and out of the country faster before deadlines, or they've already faced some of these tariffs and they're struggling to figure out how to get around things and get products that they need.

The dollar is also a key part of a lot of investment strategies. How has a weaker dollar changed the approach of money managers? Well, it's a broader picture, right? So there's a weaker dollar for confusing reasons. It's unclear whether the U.S. economy is going to be able to weather this storm of tariffs. And so if there's uncertainty about where the economic growth is going and which means where is the dollar going, investors don't know where to place their money for a surefire bet.

So they don't know whether we should just sell our investments and just keep cash. We saw that Mobius has 95% of its money in cash right now because they just don't know where to put their money. The weakening of the dollar has consequences everywhere. And this is something that you examine in your book as well.

When you think about all of the different effects that we've seen around the world from this, what's been most unexpected or stood out for you? There's a lot of talk about the dollar's demise as the world's reserve asset. When we talk about a strong or a weak dollar, there's two definitions to that. There's the first one that we've already discussed, which is

its strength or weakness by foreign exchange rate against any other currency at a day-to-day trading level. The second is just the dollar's global dominance. The dollar is on one end of 92% of transactions in the world.

The dollar is the lingua franca of global finance. And if the world, if foreign central banks, foreign allies, investors are wondering that the U.S. policymakers are maybe behaving in a less credible manner, then the dollar may not maintain some of its dominant status because investors and foreign central banks are going to think maybe we need to diversify away from U.S. assets.

And when you have that trend begin, that means that American sanctions, economic sanctions, will become less potent. It means that the U.S. will have a little bit of a less stronghold on the global economy and military prowess. But also, it's important to remember that nothing's going to happen overnight. So the dollar gained its dominance over many, many decades. It's

going to take a decade plus for it to actually come off of that very high perch. And maybe we'll move more into a multi-currency world where the dollar remains dominant, maybe not quite as dominant as it has been, with some other currencies also gaining some of that strength. For now, does it look like the trend of the weaker dollar is set to continue?

If we're talking about foreign exchange rate and that weak dollar, then I'm really curious as to what we're going to hear from the Federal Reserve in the next couple of weeks. You know, they have an interest rate decision coming up. Are they going to cut rates? Are they going to signal that the rates could go lower depending on where economic growth? I think right now the power for where the dollar is headed in terms of foreign exchange rate may lie with the Fed and interest rate paths.

Thanks to our senior Washington correspondent, Salaya Mohsen. And you can read more on this in Salaya's book, Paper Soldiers, How the Weaponization of the Dollar Changed the World Order. For more explanations like this from our team of 3,000 journalists and analysts around the world, go to Bloomberg.com slash explainers. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

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