The current economic situation in the USA is characterised by an exciting tension between growth, inflation expectations and a very strong currency. The US dollar (USD) is experiencing a strength that has far-reaching effects on global markets, the credit landscape and the willingness to invest. The focus here is on the fiscal and trade policy decisions of the government under Donald Trump and the monetary policy interventions of the Federal Reserve (Fed).
Interest Rate Policy and Market Reactions: A Balancing Act
The Federal Reserve lowered interest rates by 0.25 percentage points in December, but at the same time emphasised that further interest rate cuts were unlikely in 2025. This statement was initially met with scepticism by the markets before the high economic growth and fiscal stimulus revived risk appetite. It remains to be seen whether the Fed will find room for manoeuvre for monetary policy adjustments in an environment of continued low inflation and solid consumer spending.
Interestingly, the FED is suggesting that inflation cannot be ruled out in the long term – an assessment that is relevant in the context of the Trump administration’s protectionist tariffs. Tariffs that were originally intended to strengthen the US market could turn out to be price drivers via detours.
The Global Dimension of USD Strength
The strength of the USD has a massive impact on countries and companies that are indebted in USD. A rising USD makes their credit burden more expensive and can lead to balance sheet problems in the short term, especially if income in other currencies is not sufficient to cover the loan amount in the short term. Although the burden often remains sustainable in the long term, the creditworthiness and ratings of these players can suffer. The result is higher interest rate premiums and a reduced willingness to invest – a vicious circle that is particularly noticeable in emerging markets.
The strength of the USD has a similar effect to a liquidity contraction and inhibits economic growth outside the USA.
A further appreciation of the USD is to be expected, which could additionally slow down economic development outside the US in the first half of 2025.
The tariffs imposed by Trump are intensifying this effect and are causing US companies to build up stocks in order to avoid tariff increases.
Balance of Trade and Competitiveness: A Balancing Act
A strong USD is a burden on US export activities. Imports become more favourable due to the stronger currency, which could further exacerbate the trade deficit. This will widen the already high deficit even further. At the same time, the question arises as to how the government can counteract this trend. A ‘Mar-a-Lago Accord’ similar to the Plaza Accord could be an approach to slow down the strength of the USD and thus break the vicious circle of trade deficit and economic disparity.
The Paradoxical Debt Situation in the USA
Another noteworthy point is the interest rate policy of the USA compared to other countries. Despite being the issuer of the globally dominant currency, the US is currently paying 4.63 per cent interest on its 10-year bonds, while China was paying just 2 per cent on a USD bond in December. This difference reflects the actual risk of the USA’s creditworthiness better than any abstract consideration. The better borrower pays less interest. Such a discrepancy raises long-term questions about the sustainability of US government debt.
Conclusion: Need for Political Action and Global Perspectives
The strength of the US dollar is a double-edged sword: on the one hand, it boosts the USA’s position in global competition, but on the other, it harbours considerable risks for its own export economy and global financial stability. The government under Donald Trump faces the challenge of mastering this balancing act and finding a sustainable solution to the economic policy tensions. A coordinated international approach could be the key to countering the negative consequences of the USD’s strength and stabilising global trade.
A strong USD may bring short-term benefits, but in the long term strategic decisions are needed to keep the economic dynamics of the US and the world in balance.
