Is the Dollar’s Era Of Exorbitant Privilege Ending?

The dollar’s global standing is a mixed blessing. Its status as a safe haven and dominant reserve currency lowers the US cost of borrowing — the so-called “exorbitant privilege” — which means more investment, more growth and higher incomes in the aggregate. But the dollar’s strength also leans against the economy’s competitiveness in international trade, which puts some of its producers at a disadvantage. What a shame that, on the face of it, you can’t collect the benefits of a strong currency alongside the benefits of a weak one.

On one interpretation, though, the Trump administration is aiming to do just that. According to a strategy mapped out by Stephen Miran, chairman of the president’s Council of Economic Advisers, it’s possible to nudge the dollar’s value lower without causing long-term interest rates to rise — thus achieving greater competitiveness in trade without surrendering the exorbitant privilege. The key is to change the terms of international trade and finance by using all the instruments of US power.

By itself, declaring a weak-dollar policy might spur a flight from dollar assets and, as a result, sharply higher interest rates. So it’s better, as Miran explained, to start with tariffs. They wouldn’t do much to reduce the trade deficit, because lower imports would mean a stronger dollar, reversing the gain in competitiveness and squeezing exports as well. But this is only the first stage.

The threat of punitive tariffs would give the US leverage to use alongside other pressure (such as threats to withdraw security cooperation) to extract concessions on trading partners’ tariffs and non-tariff barriers — and to impose new currency arrangements (including the management of dollar reserves) that would enable an orderly dollar depreciation. This new “Mar-a-Lago Accord” would affirm the dollar’s global standing, prevent dollar flight and restrain long-term interest rates. Get the sequencing right and the end result could be moderate tariffs (as opposed to the sky-high rates threatened at the outset) and less government borrowing (thanks to tariff revenues), causing a smaller inflow of capital, a smaller trade deficit, a judiciously depreciated currency and no spike in borrowing costs.

Ambitious. I noted some of the difficulties with all this (many, to be sure, emphasized by Miran) in a previous article. But how is is it working out?

So far, not quite as envisaged. The initial onslaught of actual and threatened tariffs caused the dollar to depreciate, not appreciate, and pushed long-term US bond yields higher. That’s not good. The combination of a cheaper dollar and higher long-term interest rates is unusual. At the very least it suggests an uptick in nervousness about holding dollar assets — intimations, you might say, of a “Truss moment.”

Granted, it’s early days. Trade flows and currency fluctuations will be hard to read until the smoke clears, if it ever does. (For instance, many importers have accelerated their purchases to build up stocks before most of the tariffs kick in, clouding the eventual effect on prices, trade volumes and exchange rates.) The administration is rewriting the rules of global trade even as it champions a huge expansion in government borrowing (tariff revenues notwithstanding) and threatens the independence of the Federal Reserve. Given all of the above, recent fluctuations in interest rates and the dollar, though notable, have been modest.

Nonetheless, investors clearly have their doubts. One obvious reason for anxiety is confusion over how the strategy is meant to unfold. The endless back-and-forth on country-by-country tariffs, threats and retractions, ever-shifting deadlines and contradictory rationales make the thinking opaque to trading partners and investors alike. Yet defenders of this approach would say that’s the whole idea. “Strategic uncertainty,” as Treasury Secretary Scott Bessent calls it, gives the US leverage in negotiations. On this view, you don’t want the other side to know what you’re thinking. Once you’ve struck the best possible deal, clarity will ensue.

Maybe. Despite the risks, one can imagine investors coming to terms with disruption as long as it’s yielding wins for US interests. Much more dangerous is the administration’s failing to see where US interests really lie and, in particular, failing to see that trust in US leadership — and with that, the dollar’s preeminence — is a vital US asset.

Initial confusion over tariff policy is consistent with the Mar-a-Lago project; reconfiguring the international monetary and financial system is indispensable to it. Here is the core contradiction. The program envisages new arrangements that spread the costs of global governance more equitably. It doesn’t just want to smash the existing multilateral norms and institutions, a process now well under way; it wants new ones, not least to underwrite the dollar’s exorbitant privilege.

If confidence in the dollar subsides, other governments might question their reliance on dollar reserves for liquidity purposes and wonder whether their financial systems should be so closely integrated with America’s — potentially, a vicious circle. The administration understands this threat. It has told the expanded BRICS group of developing and emerging-market economies to expect higher tariffs on goods they sell to the US if they move forward with plans to rely less on the dollar in their trade with each other. Another way to defend the exorbitant privilege, discussed by Miran, would be to demand that other governments change the composition of their dollar reserves by adjusting the duration of their holdings to avoid upward pressure on long-term yields.

But all such deals depend on mutual advantage and trust — and the administration’s goals and methods unsettle both. In the era now ending, the US was mostly perceived as a beneficent hegemon providing global public goods and enjoying the exorbitant privilege (and other benefits besides) in return. In the new era, it promises to exert power more selfishly — to be less exploited by other countries, as the administration would say. Yet it still wants a kind of multilateralism (a durable system of arrangements and understandings) and it still wants to be in charge.

The dilemma for other countries is acute. It isn’t just that they’re to be denied some of the benefits of pre-Trump US hegemony — in Europe’s case, for instance, the protection of US military power at relatively little cost. It’s also that the new order, once such concessions have been banked, will be far less stable. Favoring US imports and terming out dollar reserves might do for now, but what comes next?

Even if financial markets, against the odds, take the trifecta of tariffs, fiscal incontinence and Fed intimidation in stride, one question will surely erode global confidence in the dollar system: How far can you trust a more selfish, impatient and erratic hegemon? If Trump cares about the dollar, he needs a clearer endgame and a better answer.