Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carroll, and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg.
I think on the long term, it is important that we have a strong dollar. The dollar is the reserve currency of the world, and a strong dollar refracts a strong economy. In the short term, particularly because of trade. You know, the strength of the dollar can can have a negative impact.
These days, everyone has an opinion on the dollar. That's former US Treasury Secretary Stephen Manusan speaking to Bloomberg recently. The dollar is a key part of America's economic strength that underpins global finance and trade. But since Donald Trump unleashed his global trade war, there are cracks in the
greenback's image. Bloomberg's Dollar Index, which measure its strength against ten leading global currencies, has had its worst start of the year since it was created in two thousand and five. I think there's.
One thing where there's a sea change the dollar.
I don't think you can can overstate the importance of this dollar shift.
What the dollar is doing is particularly critical, namely to watch whether is this foreigner silling, is this domestic invester silling.
If you're not a dollar based economy, you have to understand how that's going to impact your investments.
This isn't just a big deal for the US. The dollar's central role in the global economy means the consequences are felt just about everywhere. So here's why a weaker dollar matters for the world. Our resident dollar expert Celemoson is back with us to explain. Seleia, you are our senior Washington correspondent but also author of the book paper Soldiers, How the weaponization of the dollar changed the world order.
Great to have you back with us. Can you put in context the drop that we've seen in the dollar this year?
For US, it's a huge drop and itself inflicted. It wasn't because there was an attack on the country or that there was an economic collapse. It was because the president imposed economic and fiscal policy that has shocked the world. Traders weren't ready for investors, foreign allies, and also puts
future growth into uncertainty. The other reason the drop is interesting is because usually the economic theory predicts that if tariffs are announced, you would think that the dollar would actually trend higher and stronger because it is a safe haven, and so everyone would think, oh, there is uncertainty, there is risk coming down the pike, let's go to the safest asset in the world. But actually there was a flight of capital from the US and US based assets, and that included the dollar.
So who are the big winners and losers than from a weaker dollar.
Foreign tourists coming into the country are benefiting from this because their foreign currencies are able to get more for their buck. Of course, we have other considerations that are damaging tourism to American like some of the visa and travel and use citizenship issues. But for American consumers or Americans traveling abroad, that means that their dollar stretches not
quite as far as it used to. So if you're in Europe, your burger at McDonald's is going to cost more than it used to because your dollar is weaker. It is somewhat good, you would think in theory for American manufacturers, because they're able to export more goods because
foreign countries can purchase more afford more American goods. But the tensions, the geopolitical tensions, the economic ties between trade partners and allies have become strained from Donald Trump's manner and methods and applying these tariffs, and so there isn't that much political will to purchase from the United States.
What about for companies elsewhere in the world that might be considering, I suppose broader impacts on their businesses, like for example, here in Europe.
The big problem for them right now is that there's so much uncertainty. It's really unclear exactly how this is going to impact economic growth. Now. A lot of predictions are out there of a recession in the United States for one or two quarters. It depends on how some of these trade deals shake out, and so the uncertainty is making it hard for all businesses to make plans for the future, including European businesses. Also, the supply chain
shock is really syncing in for people. It's confusing to know when the terraffs will be applied, which terrafts will really hold once this ninety day pause and all the trade deals have been struck, So businesses are scrambling and either trying to get goods in and out of the country fastered before the deadlines, or they've already faced some of these tariffs, and they're struggling to figure out how to get around things and get products that they need.
The dollar is also a key part of a lot of investment strategies. How has a weaker dollar changed the approach of money managers?
Well, it's a broader picture, right, So there there's a weaker dollar for confusing reasons. It's unclear whether the US economy is going to be able to weather this storm of tariffs, and so if there's uncertainty about where the economic growth is going, and which means where is the dollar going, investors don't know where to place their money for a surefire bet, right, so they don't know whether we should just sell out of our investments and just
keep cash. We saw that Mobius has ninety five percent of its and its money in cash right now because they just don't know where to put their money.
The weakening of the dollar has consequences everywhere, and this is something that you examine in your book as well. When you think about all of the different effects that we've seen around the world from this, what's been most unexpected or stood out for you.
There's a lot of talk about the dollar's demise as the world's reserve asset. When we talk about a stronger a week dollar, there's two definitions to that. There's the first one that we've already discussed, which is its strength or weakness by foreign exchange rate against any other currency at a day to day trading level. The second is just the dollar's global dominance. The dollar is one end of ninety two percent of transactions in the world. The
dollar is the lingua franca of global finance. And if the world, if foreign central banks, foreign allies, investors are wondering that the US policymakers are maybe behaving in a less credible manner, then the dollar may not maintain some of its dominant status because investors and foreign central banks are going to think, maybe we need to diversify away from US assets. And when you have that trend begin, that means that American sanctions economic sanctions will become less potent.
It means that the US will have a little bit of a less stronghold on the global economy and military prowess. But also it's important to remember that nothing's going to happen overnight. So the dollar gained its dominance over many,
many decades. It's going to take a decade plus for it to actually come off of that very high perch, and maybe we'll move more into a multi currency world where the dollar remains dominant, maybe not quite as dominant as it has been, with some other currencies also gaining some of that strength.
For now, does it look like the trend of the weaker dollar is set to continue?
If we're talking about foreign exchange rate in that week dollar, then I'm really curious as to what we're going to hear from the Federal Reserve in the next couple of weeks. You know, they have an interest rate decision coming up. Are they going to cut rates? Are they going to signal that the rates could go lower depending on where economic grows. I think right now the power for where the dollar is headed in terms of foreign exchange rate may lie with the Fed and interest rate paths.
Thanks to our senior Washington correspondent, Silia mosen And, you could read more on this in Selaia's book paper Soldiers, How the Weaponization of the Dollar Changed the World. Order For more explanations like this from our team of three thousand journalists and analysts around the world, go to Bloomberg dot com slash Explainers I'm Stephen Carroll. This is here's why. I'll be back next week with more Thanks for listening.