Our tariff-era dollar, your problem

In 2025, the dollar index, which measures the greenback’s strength against a basket of major currencies, fell by roughly 9.4%.

- Qiyuan Xu

A worker displays US dollar banknotes at a New Delhi money exchange on July 30, 2025.

(AFP)

Over the same period, the United States’ average effective tariff rate rose by around 14.4 percentage points, from 2.4% to 16.8%, according to the Yale Budget Lab. Taken together, these shifts imply that, in the import trade domain, the US experienced an effective exchange-rate depreciation of around 24%.

Such a scenario is politically attractive to the US because it protects manufacturing competitiveness and generates additional tariff revenue while the dollar remains relatively stable. That stability, in turn, helps support the prices of US Treasuries and other dollar assets, reducing the risk of a vicious cycle of broad depreciation, unmoored inflation, capital outflows, and financial-market stress.

But the balance-of-payments “mirror” remains. So long as the dollar is the world’s reserve currency of choice, persistent net capital inflows into the US — which necessarily correspond to America’s current-account deficit — are unlikely to disappear, making structural imbalances hard to resolve. In fact, this dynamic may generate additional costs, which will likely fall disproportionately on non-US economies, especially emerging markets.

Historically, the dollar has weakened when the US Federal Reserve eases monetary policy, US long-term yields fall, and global investors’ risk appetite improves — conditions that loosen international financing constraints and expand offshore dollar liquidity. But this time around, the dividend from a weak dollar may be sharply discounted, because tariffs act as a wedge that “preadjusts” relative prices in international trade, reducing the nominal exchangerate depreciation required for external rebalancing.