Dollar dominance: Trump’s tariff plan would weaken greenback

In a note on Monday, Ulrich Leuchtmann, the bank’s head of foreign exchange research, analyzed a theoretical chain of events that could play out in US financial markets if Trump’s threat to impose 100% tariffs on countries that shun the dollar, a pledge made at a rally in Wisconsin on Saturday, becomes reality.

In Leuchtmann’s view, investors should pay attention to Trump’s campaign promises. He warned that prohibitive tariffs could have the opposite of their intended effect. It’s possible that the harsh policy would incentive countries to move away from the dollar, which would threaten the safe-haven status of Treasuries and “lead to massive dollar weakness,” the strategist wrote.  

“Trump now wants to change that and force dollar dominance. That changes everything,” Leuchtmann wrote. “If the US were to impose prohibitive tariffs across the board, they would cause massive disruption to the global economic system.”

To be sure, it’s not uncommon for promises made on the campaign trail to not materialize. There’s also countless calls over the years for the dollar to falter as the world’s reserve currency that so far have been incorrect.

Leuchtmann, a veteran currency strategist with a career spanning more than 20 years, also acknowledged in his note that there are arguments for why the dollar would strengthen under a Trump presidency. This year, he’s largely been bullish on the dollar. 

Other strategists, such as those at Morgan Stanley and Deutsche Bank AG, have previously argued that Trump’s tariff platform and focus on driving US economic growth would result in a stronger dollar. To some extent, the range of scenarios articulated by market watchers underscores the difficulty of making predictions based on shifting political winds.  

While dollar dominance has lessened in recent decades, the US currency still accounted for 59% of official foreign-exchange reserves in the first quarter of 2024, with the euro second at almost 20%, according to the International Monetary Fund.

Former President Trump led Vice President Kamala Harris by 48% to 47% in a New York Times-Siena College poll published Sunday. While within the margin of error, the result suggests that Harris’ month-long rise in the polls may have stalled and Trump’s support remains resilient.