Wall Street unsettled as Trump applauds sharp decline of the dollar

Concerns Rise Over US Dollar's Sharp Decline

Wall Street is increasingly anxious that global investors are losing confidence in US economic leadership. AP Photo/Richard Drew

The US dollar has experienced a significant drop, yet Donald Trump insists this is beneficial. Since January 19, the dollar has fallen 3.19% against a group of major currencies, reaching its lowest point in four years. On Tuesday alone, it slipped by nearly 1%.

“I think it’s great,” President Trump remarked during an event in Iowa. “Look at the value of the dollar. Look at the business we are doing. The dollar is doing great.”

These comments have heightened worries among investors that the Trump administration is intentionally pushing for a weaker dollar to help narrow the US trade deficit.

Trump is also focused on boosting the US stock market, aiming for increased corporate profits through lower interest rates and higher export revenues.

Last week, after his controversial tariff announcement regarding Greenland at Davos, Trump highlighted the Dow Jones index’s approach to the 50,000 mark.

He predicted, “The stock market is going to double in a relatively short period of time because of everything that’s happening.”

Investor Confidence Wavers

Despite Trump’s optimism, many on Wall Street remain skeptical. The primary concern is that international investors are losing trust in US policy decisions under Trump’s leadership.

This erosion of confidence could threaten both the dollar’s role as the world’s reserve currency and the global appetite for US government bonds.

“It is alarming,” says Jonas Goltermann, deputy chief markets economist at Capital Economics.

Goltermann notes that the speed of the dollar’s decline is more troubling than the size of the drop itself.

Robin Brooks, a senior fellow at the Brookings Institution and former Goldman Sachs strategist, expects further declines. “We are only a couple of days into this latest move and the drop in the dollar on Tuesday was bigger than previous days. So I don’t think this move is over yet,” he says.

Brooks believes the dollar could fall another 2% to 3% before stabilizing, depending on when markets perceive the next major policy misstep from the Trump administration.

Policy Moves and Market Reactions

A key factor behind the dollar’s weakness is renewed signals that the Trump administration favors a softer currency—a stance Trump promoted before the election to address the trade deficit.

A weaker dollar makes US exports more affordable for foreign buyers and imports pricier for Americans, potentially supporting Trump’s efforts to revive domestic manufacturing.

However, the dollar’s strength is also tied to foreign demand for US government bonds, which are seen as a safe investment denominated in the world’s reserve currency.

This demand helps keep bond yields—and thus government borrowing costs—low, linking the dollar’s value to the US’s ability to finance its growing budget deficit affordably.

Trump’s Economic Strategy

Trump’s economic adviser, Stephen Miran, who was appointed to the Federal Reserve’s board in September, has crafted the so-called “Mar-a-Lago accord,” named after Trump’s Florida resort.

If foreign investors begin selling US treasuries, the Federal Reserve could step in to purchase bonds and keep yields down, though such intervention may wait for a new Fed chair.

Another aspect of the accord involves working with international partners to coordinate currency interventions that weaken the dollar without causing instability. Japan, seeking a stronger yen, is a likely collaborator.

Last week, the US Treasury took initial steps to support Japan’s weakening yen, which would involve selling US dollars and further weakening the currency.

“That’s a big shift from the way the US has done currency policy for the past 30 years,” Goltermann observes.

Still, analysts warn that the dollar’s recent plunge is reminiscent of last April’s market turmoil following Trump’s “liberation day” tariffs, when the dollar dropped nearly 6% in three weeks.

“We’re in another moment that feels very similar to April last year. In both cases, the trigger is kind of this perception that policy is just chaotic,” Brooks comments.

Uncertainty and Global Impact

Trump’s ambitions, such as his proposal to acquire Greenland and threats of new tariffs on European nations, have unsettled investors and fueled uncertainty about the global order.

“I think it’s a crisis of confidence,” Brooks concludes.

Phil Blancato, CEO of Ladenburg Thalmann Asset Management, notes, “Investors have grown more cautious about US policy risks and political uncertainty. Unpredictable US policymaking is increasing the risk premium on the dollar.”

Foreign investors are not selling US assets outright but are hedging their dollar exposure, which is contributing to the currency’s decline, according to Blancato.

He adds, “Concerns about Federal Reserve independence and fiscal discipline are weighing on longer-term confidence in US policy credibility.”

Risks to the Treasury Market

Goltermann warns that the greatest risk is if this loss of confidence spreads to the US Treasury market. If bond investors become nervous, they may demand higher yields, raising government borrowing costs at a time when US debt has reached a record $38 trillion.

“That’s the obvious risk that people are worried about,” Goltermann says. “The weaker dollar itself would not necessarily do that. It’s more if you get this loss of confidence in US institutions.”

He points out that America’s large fiscal deficit, Trump’s use of the legal system for political purposes, and his criticism of the Federal Reserve could all undermine trust in the Treasury market.

If this crisis of confidence continues, Brooks warns, it could erode the dollar’s status as the world’s reserve currency, prompting countries to seek alternatives.

Central Bank Independence Under Pressure

Trump has intensified his criticism of the central bank for not cutting interest rates faster, raising concerns about the Fed’s ability to operate independently—especially with Jerome Powell’s term as chairman ending in May.

The Department of Justice recently launched a criminal investigation into Powell, which he described as politically motivated.

Trump has also attempted to remove Fed governor Lisa Cook over mortgage fraud allegations, though the Supreme Court has blocked this effort so far.

The president is expected to soon nominate Powell’s replacement. If the new chair favors more aggressive rate cuts, it could further weaken the dollar, even if investors are not immediately concerned about the Fed’s independence.

David Lubin, a senior fellow at Chatham House, observes, “There is a sense that the institutional underpinnings of the US role in the global economy seem to be weakening.”

Confidence Drops Among Public and Investors

It’s not just investors who are uneasy—public sentiment is also falling. The Conference Board’s consumer confidence index dropped by 9.7 points in January to 84.5, its lowest since 2014, worse than during the pandemic or after Trump’s “liberation day” tariffs.

Trump’s strategy for the dollar may not be delivering the results he anticipated.