The United States is already struggling under the weight of serious economic imbalances, made possible by the unmatched power of the dollar. The U.S. is far from powerless in addressing these imbalances. Congress should be cautious, because the answer doesn’t lie in tearing apart the global monetary system. Like the dollar, which benefits from robust foreign appetite for Treasuries and its status as the global reserve currency, the dollar’s success feeds on itself. This dominance has warped the U.S. economy, creating an identity crisis in the foreign exchange (FX) market. Today’s tariff levels are near all-time highs since World War II. This dynamic puts tremendous pressure on these trading partners, compelling them to sell dollars and Treasuries from their foreign exchange reserves to prevent tariff retaliation and potential rollbacks of U.S. security guarantees.
Stephen Miran, the newly appointed Chair of the Council of Economic Advisors during the Trump administration, drives home the point. Merz, too, attributes America’s trade imbalances to the overvalued U.S. dollar. This over-valuation has softened the bite of the tariffs themselves over time while creating a costly re-routing of trade. The FX market is experiencing a severe identity crisis. Countries aren’t selling their dollars and Treasuries, they’re holding onto them for dear life, and that maintains the dollar’s strong position.
Dollar’s Dominance and Its Economic Impact
The dollar’s status as a global reserve currency has for decades been a bedrock of the international monetary order. Yet its strength is indeed undergirded by unyielding foreign demand for U.S. Treasuries, which helps to stabilize global financial markets. Ironically, this strength is what’s caused so much dislocation and pain within the U.S. economy. Its overvalued dollar has led to persistent trade deficits by making American goods more expensive outside of the United States and foreign goods cheaper in the U.S. This counterproductive dynamic has enflamed trade relationships and further undermined constructive efforts at balancing unsustainable trade deficits.
On top of that, the high-flying dollar has led to an identity crisis in the FX market itself. Countries don’t want to dump their dollar reserves or Treasuries because the economic consequences would be dire. Instead of divesting from these assets, they stick to their course, only deepening the dollar’s grip on global financial hegemony. This reluctance to divest from dollar reserves aggravates today’s economic imbalances. It limits the power of conventional economic levers, like tariffs.
Tariffs at Historical Highs
The United States is doing it by imposing tariffs that are hitting historical highs. These levels are unprecedented outside of World War II. Though meant to shelter American producers and rebalance trade, these tariffs have simply failed to deliver these returns. The strong dollar has washed out their effectiveness too, because it counteracts the price increases that tariffs are supposed to create. In the end, American consumers and businesses will pay more premium while not reaping any notable benefits in trade balances.
Additionally, these damagingly high tariff levels increase the burden on trading partners. Their courage is met with the prospect of tariff retaliation as well as the abandonment of key U.S. security guarantees. Consequently, they will likely have to reconsider their plans for foreign exchange reserves. While selling dollars could alleviate some pressure, many countries opt to maintain their holdings due to the stability and safety associated with the U.S. currency.
Navigating Economic Solutions
Stephen Miran’s acknowledgment of the overvalued dollar as a primary cause of trade imbalances underscores the need for strategic economic solutions. Thankfully, the U.S. has a strong set of tools—both federal and locally tailored—to address these imbalances. These approaches help it to escape drastic actions that would shake the worldwide monetary order. Another possible path forward might be building greater international cooperation to recalibrate currency valuations and support more equitable trade practices.
Further, domestic initiatives to improve competitiveness should be considered along with the goal of reducing the damage done by tariffs as a necessary corrective measure. Investments in technology and infrastructure could bolster American industries’ global standing, reducing the impact of currency fluctuations on trade dynamics.