Is Trump Bringing Back the Currency Wars? It’s Complicated.

According to the Washington Post and other publications, the currency wars are back! In truth, the currency wars that started in 2010 never went away.

Currency wars have more active and less active phases. There’s no doubt that we’re in an active phase right now, with the U.S. dollar hitting interim highs and currencies like the euro and Swiss franc hitting lows they haven’t seen in years. The yen hit 155 to the dollar, a level not seen since 1990. King Dollar has returned with a vengeance.

American policymakers are claiming that the U.S. is on the wrong side of a currency war. The basic idea behind currency wars is that if a country can cheapen its currency, it can sell more exports because the cheap currency makes your goods more affordable to buyers from other countries. If Indonesia wants to buy new passenger jets and they have a choice between Boeing and Airbus, it might make a difference if the euro was weaker because the Airbus would be more affordable measured in dollars or another currency.

As I explained in my book Currency Wars, this theory has many flaws. It’s true that a weak currency makes some U.S. goods cheaper for foreign buyers. But it also makes imported goods more expensive for U.S. manufacturers. To the extent that many manufactured goods are combinations of imported and locally produced inputs, it’s not clear just how exchange rates affect the final cost of goods.

A weak currency can also import inflation (because it takes more dollars to buy imports). That can be dangerous when inflation is already too high in the U.S. Likewise, a strong currency can be disinflationary, which is one of the Fed’s policy goals at the moment.

Still, this Washington Post article and others like it are making a point that goes beyond macroeconomic impacts. They are accusing Donald Trump of working on a secret plan to cheapen the U.S. dollar to promote exports while ignoring some of the adverse consequences, including inflation.

But that’s a red herring. Trump is not trying to start a currency war; he’s trying to end one.

I made the point in my book that currency wars can last 15 or 20 years. I’m not surprised that a currency war that Obama started in 2010 is still going strong in 2024. Trump’s actual idea is to convene a summit conference of major powers similar to the Plaza Accord of 1985, at which the powers would agree to semi-fixed exchange rates that could be enforced through foreign exchange market intervention by central banks and finance ministries. Countries that did not join the currency accord could be subject to steep tariffs.

The Plaza Accord led to 23 years of currency peace and steady growth from 1985-2008. That’s Trump’s real goal. Don’t believe the propaganda and fear-mongering coming from DC and Wall Street. They’re just looking out for themselves.

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