Greenback-lash

Trump's tariff troubles critically undermine dollar diplomacy, and it will hurt the average American.

(Credit: Getty Images)

The S&P 500 lost 5.8% in March, marking its worst month since 2022, and leaving investors wondering what comes next. The index is just one critical indicator of a market under strain.  Looking beyond Wall Street, NFIB’s February 2025 Small Business Optimism Index indicates that the Trump administration’s economic missteps have erased American entrepreneurs' post-election confidence. At the center of this are inflationary pressures and uncertainty over the future. 

Blame could be placed on Trump’s trade wars with America’s largest trade partners–Canada, Mexico, and China–but policy uncertainty is the more likely culprit. Heavy tariffs, collapsing trade networks, weakening military alliances, and shifting global orders creates a cocktail of uncertainty that markets and American allies despise. While American wealth may suffer in the interim, confidence in the dollar, which is the foundation of the global financial market and American diplomacy post-World War II, may be crippled.

When markets faltered in the past, nations with significant dollar reserves turned to the Fed for lending. Close connections between the Fed and friendly nations’ central banks has helped prevent economic shocks from turning into catastrophes. During the 2008 Financial Crisis and the COVID-19 Pandemic, the Fed’s cross-border lending and currency swaps stabilized both the U.S. and global economy. Colin Weiss, a principal economist at the Fed, found that nearly three-quarters of U.S. Treasury bonds, bills, and other safe holdings are held by nations with military ties to the U.S. 

Outside of Chinese holdings, the dollar’s dominance is supported by American allies. Trust in American military and economic assistance served as an anchor, even in turbulent times. This mutual confidence spurred nations to buy American currency not just because of its strength, but the interconnected interests of our markets and governments. 

Since January, the Trump Administration has dismantled critical foreign partnerships–the very partnerships dollar diplomacy, and in turn critical economic supports, rely on. As China diversifies their reserves to move away from the dollar, America’s need for reliable allies has never been more urgent. But instead of reinforcing these critical partnerships, Trump’s policies erode them, and the administration does not recognize a weak dollar and American isolation as negative outcomes. 

Citizens may see foreign policy and trade deficits as distant concerns, disconnected from everyday costs like energy, groceries, and rent. But, Trump’s economic agenda brings costs off news tickers and onto price stickers. Small businesses struggle to expand or lower prices without a strong Fed, and a strong Fed needs foreign faith and investment. 

Trump argues that much of America's debt stems from an unfair imbalance of imports over exports. To him, when countries capitalize on this trade gap, they are “taking advantage” of the U.S., and his solution is to weaken the dollar. There is an alternative perspective: America’s global trade partners invest in the U.S. because they see American markets as safe. The American trade deficit is not a weakness, but a reflection of global desire to invest in America, which causes an imbalance that develops into a deficit. The nation’s greatest export is not cars and steel, but financial stability, global leadership, and economic facilitation. 

The Trump administration desires to correct trade imbalances with a weaker dollar that allows manufacturers to sell more exports. This goal displays a fundamental misunderstanding of where American power emanates from and demands severing ties with friendly nations. In doing this, Trump deprives America of its role as a global facilitator. In two short months, Trump has set a course toward isolation. Should his plan fail, America will be marooned with no allies, without economic leverage, and without a strong dollar to anchor its position. Economic interdependence is America’s greatest asset, not a liability. And it all begins and ends with the strength of the greenback.