The Trump effect and the weakening of the dollar

The Trump effect and the weakening of the dollar.

Jennifer Montoya[1] , OBELA[2]

After Trump's return, the US has pushed a policy of budget cuts, economic deregulation, and trade war against its main partners: Canada, Mexico, Taiwan, and China. The explicit objective is to strengthen the US economy, and the implicit objective is to weaken China and its allies. After two and a half months in office, the effect has been negative on neighboring countries and has forced the Asian giant to take countermeasures. This article will show the weakening of the dollar and the appreciation of Latin American and BRICS currencies after Washington's speeches on January 20, 2025

             The U.S. currency has weakened since 2008 and has been accentuated since 2018 with the trade war, and even more so in 2020 with the financial relief in February of the same year due to the COVID-19 pandemic. In that year, Washington injected 850 billion dollars into its economy accompanied by a decrease in interest rates to at least 0%, which significantly increased its fiscal deficit and favored the depreciation of the dollar concerning Latin America, Europe, and the BRICS (see Graph 1).

In 2025, the outlook in the US is for rising inflation and slower growth, which has led the FED to maintain its interest rate, contrary to the White House's objectives. Also, U.S. stock markets have plunged, while European and Hong Kong stock markets have strengthened. As a result, the U.S. president's popularity has been in decline. Thus, in less than seventy days, his disapproval has become greater than his approval, which weakens the credibility of the exchange rate. 

          As a result, between January 20 and March 24, 2025, the currencies of Latin America and the BRICS appreciated against the dollar. In the case of Mexico, the appreciation of the peso occurred when tariffs on steel and aluminum, which it exports to its northern neighbor, went into effect. The trend is even clearer in South American countries. During the same period, the dollar depreciated 5.3% against the Brazilian real. The Chilean peso and the Peruvian sol depreciated by 8.1% and 2.4%, respectively. 

In March 2025 Trump threatened 200% tariffs on champagne and wine from Europe. The White House's tariff measures are perceived as a sign of its economic weakness, which diminishes confidence in the dollar. The dollar also depreciated against the euro by 3.3%. The exception is the Japanese yen, against which it has gained value, but this is due to the crisis in the Japanese government.

        Graph 3 shows that the dollar depreciated against the BRICS countries.   After the inauguration, the US president announced that he would impose tariffs of 150% on the countries of this bloc if they continued with their intentions to reduce the use of the dollar as a reserve currency and in bilateral trade transactions. This is because in 2024 there has been a 50% decrease in the purchase of US treasury bonds, mostly by China, which is the main creditor of these securities. In the same vein, the bloc opted to increase its gold reserves. In addition, intra-BRICS trade is increasingly carried out in local currencies, and in 2024 it reached 65% of the total amount traded. Thus, several alternatives have emerged to reduce the use of the dollar, one of them being the mBridge platform. This is an initiative of the central banks of China, Saudi Arabia, Hong Kong, and Thailand. The platform seeks to facilitate cross-border transactions within the bloc using a digital currency issued by the central banks (CBDC), between them and some commercial banks. Although it is still under development, as of November 2024 it has reached the minimum viable product (MVP) stage and has already carried out test transactions for USD 22 billion.

               Although the BRICS proposal is far from being consolidated, data suggest that the US, instead of affecting the countries of the bloc after the announcement of tariff measures, has only caused the appreciation of its exchange rate and loss of credibility in the hegemonic currency, which strengthens the group led by China and Brazil.

            In conclusion, political speeches by the current administration have caused an acceleration in the depreciation of the dollar. This shows a loss of stability as the hegemonic currency, in its functions as a reserve and medium of exchange. Meanwhile, the BRICS have already taken concrete actions to reduce the use of the dollar, which shows a transition towards a global financial system with a lesser role for the dollar. Although some Latin American currencies have had some correction towards depreciation, especially the Mexican peso, due to its greater integration with the U.S., the dollar's trend remains downward.