Trade Tensions and the โขFuture of the Dollar‘s Global Role
A new study presented at the Brookings โคPapers on Economic Activity โ(BPEA) conference suggests โขthat escalating tariffs โand a retreat from international trade by โขthe United States couldโ jeopardize the dollar’s long-held position โฃas the world’s primary safe โhaven currency. this status, the authors argue, underpins key benefits for the U.S. โฃeconomy, includingโ lower interest rates and substantial foreign investment.
The research,conducted by Tarek A. Hassan of โBoston University, Thomas M.โฃ Mertens โof the Federal Reserve Bank of San Francisco, Jingye Wang ofโ Renmin University of china, and Tony Zhang ofโข Arizona State University, highlightsโ theโฃ link between the dollar’s “safe-haven property” – its tendency to appreciate during global economic uncertainty – andโข favorable conditions forโ U.S. businesses and investors. This safe-haven status allows U.S. companies to secure lower borrowing rates internationally and investโข more, ultimately contributing to โคhigher wages.
the โคpaper introduces aโ novel quantitative model toโ assess the โคpotential impact of rising tariffs onโ the internationalโฃ monetary โsystem. Since World War II, โฃthe dollar has dominated โฃinternational transactions, with many smaller economies pegging their currencies to it as a safeguard against financial โฃinstability.However, the authors contend that restricting trade flows through tariffs weakens the foundations โคof this specialโ role.
“Inhibiting trade โflows to and from the Unitedโ States through tariffs or โคother means, โweakens the force underpinning โthe dollar’s special role,” the authors โwrite.They predict that a loss ofโ safe-haven status could lead to increased U.S. interest rates, a decline in the global value of U.S.firms, โcapital outflows, and reduced U.S. wages. Ultimately,they warn โฃthat the U.S. dollar-centric system could collapse or transition to a different anchor currency.
According to Hassan, tariffs announced by the โคU.S. on April 2nd, and subsequent retaliatory measures from other nations, currently equate to roughly 17% symmetricโ tariffs. The model identifiesโค a tipping point of 26% tariffs โขthatโฃ could trigger either the โคbreakdown of exchange-rate management or โa shiftโฃ to an alternative anchor currency,โ most likely the euro.
While acknowledging the U.S. has not yetโ reached thisโ critical threshold, Hassan emphasized the โขbasic โconnectionโ between U.S. engagement โwith โthe global economy and the dollar’s standing. “We’re probablyโฃ still a bit away fromโ the tipping pointโ but the fundamental insight stands,” Hassan said. “The dollar’sโ status depends on theโฃ degree that the โU.S. engages with the rest of the world.”
The authors note that their model’s predictions โhave largely aligned with market reactions following President trump’s April 2nd tariff announcement.โ Stock prices and the dollar’s value both experienced a sharp decline, while long-term interest ratesโ rose. Although U.S. โstock prices have as recovered in dollar terms, they have underperformed relative to stocks in other โฃcountries, especially when considering “the dollar has massivelyโ depreciated,” Hassan stated.
CITATION:
Hassan, Tarek A., Thomas M. Mertens, Jingyeโฃ Wang, and Tony Zhang. 2025. “Trade War and the Dollar anchor.” BPEA Conference Draft, Fall.
