The US Treasury secretary this month insisted Donald Trump had not changed America’s long-standing “strong dollar” policy. But investors have been puzzling over the president’s aims for the currency as some of his allies tout the benefits of a softer greenback for manufacturers.
Many global currencies have recently appreciated against the dollar, but that is not by design. The foreign exchange movements reflect the expectation that the new administration’s radical economic agenda will weaken growth.
With Trump still intent on turning the US into a manufacturing export powerhouse regardless of the short-term economic pain, investors have wondered if the administration might ever turn to a radical currency proposal known as the “Mar-a-Lago Accord” — though prospects of it being put into practice are remote.
Why is the dollar in focus?
Before winning his second term, Trump last year said he thought dollar strength against the yen and yuan had been a “tremendous burden” on US industry and an obstacle to America becoming a “production economy”.
JD Vance, now vice-president, had previously argued that while the greenback had been “great for American purchasing power”, that had come at a cost to US manufacturing.
By historical standards, the dollar is strong.
In the months after the election it reached its highest level, against a basket of trading currencies including the euro and pound, since 2022 — and on a trade-weighted basis against a broader group, its highest in decades.
The dollar’s gains were triggered in part by anticipation of higher tariffs, which were expected to stoke inflation and make it harder for the Federal Reserve to cut interest rates.
But in recent months, growing concerns over a potential US recession have reversed some of those bets and weakened the currency as investors have priced in more cuts.
What about the ‘strong dollar’ policy?
Talk in Trump’s orbit about an overvalued dollar has prompted investors to ask whether the administration can back away from a “strong dollar” stance, in place since the Clinton administration.
Treasury secretary Scott Bessent insisted in an interview with CNBC last week that the president was “committed to the policies that will lead to a strong dollar”.
However, Bessent also decried countries that sought to engineer a bilateral weakening of their currencies against the US. Asked on Thursday about recent declines in the dollar, Bessent described the moves as a “natural” adjustment.
Where does talk of a ‘Mar-a-Lago Accord’ come from?
The idea — touted by Stephen Miran, chair of Trump’s Council of Economic Advisers, in November — takes its name from the Plaza Accord, signed in 1985 in the New York hotel Trump later owned, to help bring an over-mighty dollar back down to earth.
The Plaza Accord brought the US, France, Germany, Japan and the UK together to weaken the American currency. Forty years on, Miran believes a repeat is needed to correct a “persistent dollar overvaluation that prevents the balancing of international trade”.
At the same time, Washington still wants the dollar to retain its role as an international reserve currency — a privilege that enables the government to pay relatively low interest rates on its debt.
As part of the accord, foreign governments would be pushed into agreeing to increase the duration of their Treasury reserves, in exchange for remaining under what Miran refers to as the US’s “defence umbrella” and avoiding punitive tariffs.
The paper has come under increasing scrutiny amid a climate of uncertainty, triggered by Trump proving far more aggressive on tariffs than many investors had anticipated.
Steve Hanke, an economics professor and adviser in the Reagan White House, said: “It’s definitely in the wind, there’s no question about it.”
How are markets reacting?
Investors have struggled to position for the impact of a Mar-a-Lago Accord — if one is ever realistically put forward — in part because of uncertainty over what policies are being considered.
“The problem for the new administration is that it simultaneously wants a weaker dollar, a reduced trade deficit, capital inflows and the [dollar] to remain the key currency in international reserves and payments,” said Standard Chartered’s Steve Englander in a note last month.
Sonal Desai, chief investment officer for fixed income at Franklin Templeton, also highlighted the “internal inconsistency” in wanting a weak dollar and imposing tariffs that are likely to have the opposite effect.
The mounting risk of a US slowdown — and the potential for that to lead to more aggressive interest rate cuts from the Fed — has opened the door for Trump to get a weaker dollar while continuing with his trade war.
Traders are now pricing in two quarter-point cuts by the Fed by the end of the year, with a very high probability of a third. That compares with the one or two predicted before Trump returned to office.
The dollar’s weakness has left some people wondering whether something deeper is going on. Deutsche Bank’s George Saravelos questioned last week whether we were witnessing the “potential loss of the dollar’s safe-haven status”.
Could the US do a deal on the dollar?
Economists are sceptical.
Adam Posen, director of the Peterson Institute for International Economics, recalled that the Plaza Accord was struck with a small group of states, most importantly Japan and Germany, who were dependent on the US for security.
“Now, [in 2025] you would be dealing with China, the Middle East and half a dozen or more east Asian economies, most of whom are not direct military allies of the US,” Posen said. “They’re extremely big hurdles.”
Michael Strain, at the American Enterprise Institute, argued that the idea of an “accord” was “implausible on its face”.
“Europe is not going to rejigger its savings and investments balance or take other sorts of big macroeconomic steps in order to revalue its currency just because the Trump administration wants it to,” he said.
“I’m pretty confident in saying this is not a real thing and is not going to happen.”
Hanke added that, while shifting exchange rates might alter the contribution of various countries to the trade balance, it “won’t affect the overall deficit”.
Tinkering with the Treasuries market would also take the government into dangerous terrain.
The nearly $30tn market is the bedrock of global finance, underpins the dollar’s role as the world’s de facto reserve currency and affords the US flexibility in its public finances.
One of the proposals Miran discusses — that countries hand over their current holdings of US government debt in return for century bonds — can be seen by rating agencies as a technical default.
Such an event would be so dramatic that the impact would be nearly impossible to predict.
Connor Fitzgerald, a fixed-income fund manager at Wellington Management, said: “It’s so out of the box that there’s not really a precedent for it.”
Data visualisation by Keith Fray
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