Trump's new world order tests dollar

President Trump has launched an unprecedented challenge to a geopolitical order that has prevailed for decades. One potential victim: the U.S. dollar.

- Sam Goldfarb & Justin Baer

In just weeks, a steep increase in tariffs and uncertainty over trade have sparked fears that U.S. growth will slow. At the same time, major shifts in U.S. foreign policy have led to a surge in optimism about the European economy—driving the dollar down sharply against the euro, sending stocks in Europe to records and spurring the biggest jump in German bond yields since just after the fall of the Berlin Wall.

The WSJ Dollar Index has declined seven of the past nine weeks, nearly erasing gains made since the Nov. 5 election.

Such financial upheaval, if sustained, could have ramifications for everything from global investment flows to the direction of trans-Atlantic tourism. For generations, U.S. political leaders have generally embraced the dollar's primacy in the global financial system, in part because it has led to cheaper government borrowing. The country's spending on defense has helped bolster that position by driving up the budget deficit, financed in large part by foreign investors, who hold about a third of U.S. debt.

Now, though, Trump and some of his advisers are making it clear that they want to expend fewer resources protecting allies. And they are saying they want a weaker currency to boost domestic manufacturing, by making goods cheaper to foreign buyers.

"When you look at these policies in a macro way, they have a method to them," said Lloyd Blankfein, the former CEO of Goldman Sachs. "The risk to the markets is dislocation in the short term. But I think our republic will be better off if we spend a few thousand dollars more for a car in return for having a workforce that can make things and can afford what they make."