The dollar is no longer number one, the dollar has been kicked out

The trade war between the United States (US) and China is not the first time it has happened. The impact of the trade war is different for the United States (US) dollar.
US President Donald Trump has again made the trade war hot by threatening Beijing with tariffs of up to 245% which previously imposed import tariffs of 145% on goods from China and was responded to with tariffs of 125%.

“China now faces tariffs of up to 245% on imports into the United States as a result of its retaliatory actions,” wrote the White House statement.

Rate Policy and the Dollar Index

Along with Trump’s high tariff policy against China, projections of a decline in the US economy have finally emerged and even the superpower has the potential to experience a recession.

Previously, JPMorgan, as the largest US financial company, increased its chances of a US and global recession to 60%.

The increase in the global recession projection by JPMorgan occurred because of Trump’s tariff pressure which could threaten business confidence and slow global economic growth.

JPMorgan said it now sees a 60% chance of the global economy entering a recession by the end of this year, up from its previous estimate of 40%.

“Disruptive US policies have been recognized as the biggest risk to the global outlook so far this year. The country’s trade policies have become less business-friendly than anticipated,” JPMorgan said in its analysis, quoted from Reuters, Saturday (5/4/2025).

Several other research firms including Barclays, BofA Global Research, Deutsche Bank, RBC Capital Markets, and UBS Global Wealth Management have also warned that the US economy faces a higher risk of recession this year if Trump’s new tariffs remain in place.

Barclays and UBS warned that the US economy is at risk of entering a contraction phase, while other analysts expect overall economic growth to be in the range of only 0.1% to 1%.

Here are some of the reasons why the DXY seems to continue to slide after Trump became US President.

1. Inconsistent Tariff Policy

One of the main causes of the weakening dollar is the frequently changing tariff policy. Trump imposed high tariffs on China that continued to increase.

This policy created uncertainty in the global market, because investors could not predict the next steps of the US government. This uncertainty caused many investors to lose confidence in the dollar and switch to other currencies that were considered more stable, such as the Japanese yen and the Swiss franc.

2. Trade War with China

The trade war triggered by Trump worsened the situation. High tariffs imposed on Chinese goods triggered retaliation from China, which increased tariffs on US goods. This conflict not only harmed trade relations between the two countries but also created global economic uncertainty. As a result, the dollar lost its appeal as a safe haven currency.

3. Stagflation Concerns

Trump’s tariff policy triggered inflation in the US, while economic growth slowed. This combination is known as stagflation, which is very detrimental to the economy. Investors began to worry that the US economy would enter a recession, so they sold dollar-denominated assets and looked for safer investment alternatives.

4. The Federal Reserve’s Interest Rate Cut

To counter the negative impact of Trump’s policies, the US central bank (The Fed) cut interest rates. This move, although intended to stimulate the economy, actually weakened the dollar further. Lower interest rates make the dollar less attractive to foreign investors.

5. Massive Selloff

The uncertainty created by Trump’s policies prompted foreign investors to sell dollar-denominated assets. This phenomenon is very unusual, considering that the dollar is usually considered a safe asset amid economic or political uncertainty.

The US Dollar in the Trump Era Volumes 1 and 2

Reflecting on Trump’s first term as US President, the trade war with China began in July 2018.

At that time, the US imposed a 25% import duty on around US$34 billion of imports from China, including cars, hard drives, and aircraft parts. In retaliation, China imposed a 25% tariff on 545 types of US goods worth US$34 billion, including agricultural products, cars, and fishery products.

The trade war that began in July 2018 ultimately resulted in the imposition of tariffs on around US$550 billion of goods from China and US$185 billion of goods from the US.

A phase one trade deal between the two sides was signed in January 2020, although relations between the two countries have not improved significantly under US President Joe Biden.

Furthermore, around 2.5 months after the trade war began, the index appeared to increase.

Reported by Refinitiv, DXY on July 6, 2018 was recorded at 94.036 and around 2.5 months later or on September 19, 2018, DXY rose 0.53% to 94.537.

This is different from the conditions this year where in the last 2.5 months, the dollar index has depreciated by 8.81% (period 3 February-16 April 2025).

The strength of the dollar currency has been defeated by the euro and the Russian ruble. The euro has strengthened by more than 9% while the ruble has flown 36%.