In a previous post, I noted that, other things being equal, trade restrictions strengthen the dollar. A reader asks, why then is the dollar depreciating in the wake of the newly announced Trump tariffs?The answer, I believe, is that other things are not equal. In particular, the policy has reduced investor confidence in the U.S. economy. That’s also why the U.S. stock market is declining relative to stock markets abroad.The WSJ explains the dollar depreciation as follows:The dollar’s sharp falls after President Trump’s tariff announcement raises concerns about the risk of a broader confidence crisis, Deutsche Bank’s George Saravelos says in a note. “Developments since the start of the year make us worried about a broader undermining of confidence in the U.S. economic outlook and the medium-term desirability of dollar allocations.” This risks an unwinding of overweight positions in U.S. assets from countries that have exported capital to the U.S. over the past decade.  

In a previous post, I noted that, other things being equal, trade restrictions strengthen the dollar. A reader asks, why then is the dollar depreciating in the wake of the newly announced Trump tariffs?

The answer, I believe, is that other things are not equal. In particular, the policy has reduced investor confidence in the U.S. economy. That’s also why the U.S. stock market is declining relative to stock markets abroad.

The WSJ explains the dollar depreciation as follows:

The dollar’s sharp falls after President Trump’s tariff announcement raises concerns about the risk of a broader confidence crisis, Deutsche Bank’s George Saravelos says in a note. “Developments since the start of the year make us worried about a broader undermining of confidence in the U.S. economic outlook and the medium-term desirability of dollar allocations.” This risks an unwinding of overweight positions in U.S. assets from countries that have exported capital to the U.S. over the past decade.

 Greg Mankiw’s Blog