Across the years and various administrations there have been attempts through policy to weaken the dollar. US exports and manufacturing competitiveness can suffer when a strong dollar deters foreign sales, limits profits, and inhibits reinvestment. However, the consequences to control the dollar’s overvaluation can be unintended and significant.
Jack Jarmon (PostPravda.Info Author) and Donald Bugdal (Wall Street Analyst)
The most dramatic démarche became known as the “Nixon shock” of 1971. By the 1960s, a surfeit of US dollars spurred an over-valuation that exceeded the US’s capacity to cover the global volume with its gold reserves. In reaction, Richard Nixon suspended the dollar’s convertibility. Nixon also introduced tariffs in order to “create more and better jobs; …stop the rise in the cost of living; …protect the dollar from the attacks of international money speculators”.
Countries responded by forming currency blocs, which added more speculative pressure on the dollar and essentially dismantled the structure of fixed exchange rates in favor of the current system of floating exchange rates. Events marked the end of the Bretton Woods system founded at the conclusion of WWII, which were intended to stabilize the world financial order after the collapse and chaos following the war.
In his first term, Ronald Reagan allowed the dollar to strengthen appreciably. However, by 1985 the administration reversed itself due to growing trade concerns. Rather than the Nixonian approach of benign neglect, Reagan was more interventionist. His administration coordinated with other major economies to influence currency values – at least when it served U.S. economic interests.
Reagan later signed the Plaza Accord in his second term. The 1985 agreement aimed at depreciating the U.S. dollar; particularly, against Germany and Japan who held significant trade surpluses with the U.S. The accord was successful in achieving the US objective but had severe impact on the Japanese economy. The dollar depreciated significantly against major currencies, but helped set in motion and perpetuate the “Lost Decade” in Japan. The sharp yen appreciation contributed to Japan’s prolong period of economic stagnation in the 1990s and beyond.
Although it prepared the way for the Louvre Accord in 1987, which aimed to prevent further dollar decline and stabilize exchange rates, many economists consider the Plaza Accord as an exemplar of coordinated international monetary policy.
While achieving some short-term exchange rate stability, even this exemplary effort by governments to manipulate currency values eventually succumbed to market forces and the inability of governments to commit to currency stabilization policies that often would run counter to their own domestic economic needs.
In the next couple of decades, the US continued to engage in periodic currency management efforts largely through coordinated economic policies with G7 members. But during these years, market forces played a large role in shaping exchange rates among the world’s major economic players. Such market forces included the US-led tech boom of the late 1990s which led to a strengthening of the dollar. This was followed by the dot-com unwinding and subsequent 2008 financial crisis that resulted in dollar weakness culminating in an historic nadir for the dollar that year.
The US response to the financial crisis was sizable fiscal stimulus and massive monetary easing policies with the Federal Reserve Bank reducing interest rates to near zero and implementing unprecedented Quantitative Easing (QE) purchases of financial securities. While not directly targeting currency exchange rates, these policies led to a rapid and vigorous rebound in US economic activity which, combined with the dollar’s safe haven status as the world’s dominant currency, ended the dollar’s free-fall and eventually led to its recovery as the Fed started raising interest rates in 2015.
A similar dynamic played out following the Covid pandemic with the US dollar rising to a near two decade high in 2022 and sustaining that strength through the start of this year. The dollar’s sustained strength combined with its position as the world’s preeminent currency along with deep and well-regulated securities markets of the US, stimulated strong inflows of foreign capital into the US that helped lift asset prices and keep interest rates from spiking even as US government deficits soared to record levels.
But the downside to this capital inflow advantage were burgeoning balance of trade deficits which, combined with immigration concerns, helped fuel the America First protectionist policies of the current Republican administration. Its policies of tariffs and the relative weakening of the dollar are seen as means of restoring US competiveness by facilitating exports and making imports less competitive. Theoretically, these levies and a weaker dollar will force more balanced trade relationships with countries that currently have large trade surpluses with the US, regardless of any natural competitive advantages.
The underside, however, is told in a June 2025 report by the Organization for Economic Co-Operation and Development (OECD). It forecasts a nearly fifty percent decline in US domestic growth rate this year and next due to mounting trade costs that are a result of the Trump-initiated trade wars.
Since the start of the year, the US dollar has declined about 10% relative to a basket of currencies of its major trading partners. While this decline is supportive of “America First” objectives, it remains to be determined whether it was orchestrated by the current US administration or was due to economic uncertainty created by the Administration’s vacillating policies, especially with respect to foreign trade. Further fueling the decline of the dollar are the Administration’s increasing attacks on the independence of the Federal Reserve Bank, as well as future deficit concerns from the recently enacted “big, beautiful bill”.
The future direction of the dollar, and whether this direction will be a positive or negative for economic growth in the US and the world, is uncertain. Its recent decline could be arrested by currency traders covering their dollar short positions or it could be exacerbated should reciprocal tariffs spark trade wars throughout the world.
In the long term, the dollar’s importance and its role as the world’s dominant currency is likely to erode. Not only is there little that any US administration will be able to do about that, but the current Administration may actually accelerate the end of the dollar’s hegemony through policy errors.
Kenneth Rogoff, Chair of International Economics at Harvard and former Chief Economist at the International Monetary Fund, has argued that the future stability of the dollar is far from assured. In an excerpt from his book, “Our Dollar, Your Problem”, he offers this central pith and warning:
“The greatest dangers to the dollar supremacy, however, come from within, and it does not matter which party is in power, especially if one or the other has too much of it.”
Jack Jarmon has taught international relation at the University of Pennsylvania and Rutgers University where he was also Associate Director of the Command, Control and Interoperability Center for Advanced Data Analysis. In the mid 1990s he was USAID technical advisor for the Russian Privatization Committee during its economic transition period.
Donald Bugdal was a Senior Credit Analyst on Wall Street. His work involved evaluating the credit worthiness of major public corporations across a broad span of industries and Government Sponsored Enterprises (GSE). He is graduate of the Wharton School of Business of the University of Pennsylvania and founder of Donald J. Bugdal & Associates, a New York area-based financial advisory firm.
