US Dollar: A Contrarian Perspective on How Trump’s Second Term Could Weaken the USD

Conventional wisdom suggests Donald Trump’s second Presidential term will strengthen the U.S. dollar through a combination of protectionist policies, tariffs, and strong economic growth, and at first glance, those dynamics paint a compelling bullish picture for the greenback.

However, a possible shift in trade policy, the extension of tax cuts, the appointment of Scott Bessent as Treasury Secretary, and potential threats to Federal Reserve independence could pave the way for a weaker greenback.

Trade Policies: A Strategic Pivot?

The Trump administration’s trade agenda dominated its first term, with constant tariffs aimed at pressuring trading partners like China, Canada, and Mexico. However, Trump’s recent comments suggest that he may not be as aggressive in instituting large tariffs this time around, instead opting to channel a different Republican President’s philosophy from a century ago.

Throughout the early 1900s, Theodore Roosevelt preached that the US should “speak softly and carry a big stick,” and while no one would characterize Trump as soft-spoken, he still may be willing to threaten (but not use) the “big stick” of tariffs to secure concessions from other countries.

For instance, in his Truth Social post threatening 25% tariffs on Canada and Mexico, he noted that the tariff would remain in effect only until those countries limited the flow of drugs and immigrants into the US. In other words, tariffs may be used more tactically as a threat in Trump’s second term, not necessarily as part of a “tariff first, ask questions later” approach the characterized the 2016-2020 period.

A less aggressive trade stance could leave the U.S. trade deficit largely intact. Historically, persistent trade deficits have applied downward pressure on the dollar by increasing reliance on foreign capital inflows. For traders, a shift in trade dynamics might reduce the safe-haven flows that have supported the greenback in recent years.

Tax Cuts and Fiscal Expansion

Trump’s commitment to extending the Tax Cuts and Jobs Act of 2017 would likely result in a significant increase in the federal budget deficit, with estimates running as high as $10 trillion over the next decade. While tax cuts may provide near-term economic stimulus, they come at a longer-term fiscal cost.

An expanding deficit raises questions about the sustainability of U.S. debt, potentially shaking confidence in the dollar. While markets seem relatively unperterbed by this possibility so far, traders have historically reacted to similar concerns by devaluing the currency in question, as increased government borrowing can lead to higher inflation expectations and reduced foreign investment demand for assets.

Treasury Secretary Bessent: Market Implications

Scott Bessent, with his deep ties to Wall Street, could play a pivotal role in shaping economic policy. His pragmatic approach may prioritize the competitiveness of U.S. exports, which could align with a weaker dollar policy. A less robust dollar would make U.S. goods more attractive abroad, potentially boosting domestic manufacturing and exports, a key aspect of Trump’s campaign platform.

For financial markets, the Treasury Secretary’s stance on the dollar often sets the tone for currency policy. If Bessent signals openness to a weaker dollar, it could spark market realignments across forex pairs.

The Federal Reserve and Monetary Policy

Trump’s contentious relationship with the Federal Reserve could take center stage during a second term. Proposals to influence the Fed’s independence, including suggestions of greater executive control over interest rates or a so-called “Shadow Chair” on the FOMC, might undermine the institution’s credibility.

The Fed’s independence is a cornerstone of global confidence in the dollar. Political interference could lead to fears of monetary instability, which would weigh on the dollar’s status as a reserve currency. In theory, this environment could drive diversification into other assets or currencies, amplifying the dollar’s weakness.

For investors and traders, these shifts could present opportunities and risks across forex and commodity markets. Understanding the broader implications of international policy responses will be essential.

Conclusion

While many expect Trump’s policies to bolster the dollar, the potential for moderated trade actions, expanding deficits, a Treasury Secretary favoring competitiveness, and risks to Federal Reserve independence could upset the consensus view, potentially putting downward pressure on the buck in Trump’s second term.

For those trading the currency markets, this contrarian view is worth considering; After all, when “everyone” takes a certain outcome for granted, that tends to be when it’s fully priced in and prone to reverse.