Cozen Currents: The Buck Stops Here?

“The uncertainty arising out of the Trump administration’s first 100 days shock and awe campaign has led to an unexpected flight from the US dollar despite its traditional role as a safe haven asset. While the dollar’s status as the world’s reserve currency is unlikely at risk in the absence of a clear alternative, its reputation can still be dented.” — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

• The US dollar’s position as a safe haven and the global reserve currency has come under scrutiny as its value has declined precipitously since the start of the Trump administration, running contrary to expectations.
• Even as President Trump backs off of his threats to fire Federal Reserve Chair Jerome Powell, the countdown to the end of Powell’s term is on and the real test of Fed independence will come with Trump’s choice of Powell’s replacement.
• President Trump and lawmakers seek to boost domestic shipbuilding but face challenges in strengthening the low capacity of the US maritime industrial base.

Subscribe to Cozen Currents

Politics of the US Dollar

The Dollar’s Decline. The US dollar had its worst performance in the first 100 days of a US presidency since the 1970s, raising questions about the future of US dollar exceptionalism.

• Since the start of former President Nixon’s second term in 1973 and through former President Biden’s term starting in 2021, the dollar has typically been strong during the president’s first 100 days, averaging a 0.9% increase in those periods. This year, the US dollar has lost around nine percent since President Trump’s inauguration, representing a significant weakening.
• The start of Trump’s second term has brought significant change, as his administration seeks to lay the groundwork for achieving its policy objectives over the next four years. The result has been a significant increase in policy uncertainty as businesses and investors attempt to understand the White House’s actions.
• Typically, in moments of uncertainty, investors turn to traditionally safe assets, such as the US dollar. However, the decline of the dollar over the past three months has turned this expectation on its head. Instead, gold has reached all-time highs, making it appear to be the preferred choice among safe havens at the moment.

A Fading Safety Net. The dollar’s fall may reflect a decline in confidence in the security and safety it previously provided, raising questions about whether it can maintain its position as the foundation of the global financial system moving forward.

• Trump’s emphasis on tariffs, from an economic textbook perspective, was expected to cause the dollar to appreciate, despite Trump’s own stated preference for a weaker dollar to help address the US’s large trade imbalance. However, the erratic way in which the tariffs have been imposed as well as the broader uncertainty associated with Trump’s expansive use of executive authority and myriad constitutional challenges with the courts has exacerbated uncertainty around the US political system, resulting in an unusually quick depreciation of the greenback.
• The historically steadfast faith in the US as a stabilizing force geopolitically over the last half century has served as the foundation for the dollar’s preeminent role as the world’s reserve currency. But now with the Trump administration’s ardent embrace of policies driven by its America First ideology, the US political system is instead serving as one of the greatest sources of geopolitical uncertainty.

The Lasting Effects. Even if the Trump administration’s shock and awe campaign were to dwindle over the rest of his second term, there may still be some lasting effects for the dollar.

• While it is far too early to say whether there is any permanent damage to the US and the dollar’s credibility, it is clear that Trump 1.0 cannot be treated as an aberration. As a result of the America First ideology that has brought populism, isolationism, and nativism to the forefront of US policy, it is more likely that other countries will consider exploring alternatives to the US dollar.
• Still, whether this effort to hedge against increased uncertainty from the US results in another currency displacing or even seriously challenging the dollar’s hegemony remains to be seen. The current markets would suggest gold rather than another nation’s currency is seen as the premier alternative to the dollar for the time being, particularly in light of increased inflation expectations, but it is unlikely that there would be a path to returning to the gold standard without a severe and sustained deterioration of confidence in the dollar.

The Fed Standoff Yet to Come

The President v. the Fed Chair. President Trump has sought in recent weeks to tamp down speculation that he will fire Federal Reserve Chair Jerome Powell, but that hasn’t stopped him from continuing his tendency to criticize the Fed chair and his interest rate decisions.

• Trump’s interest in firing Fed Chair Jerome Powell dates back to 2018 when he first launched an internal inquiry into the avenues for removing Powell due to frustrations with the pace of rate cuts. White House staff reportedly revived those deliberations at Trump’s direction this spring, with Trump telling reporters in late April, “If I want him out, he’ll be out of there real fast, believe me.” But Trump has since backtracked on those threats following counsel from his top economic advisors that the issue would only worsen market turmoil.
• Even so, Trump still holds the power to influence Fed independence and monetary policy through more traditional channels. Trump will have an opportunity to replace Powell as Fed chair when his term expires next May, a process Trump could in part speed up by announcing the replacement as soon as this fall or winter. An early announcement of a new Fed chair nominee, even if Powell wasn’t replaced before his term ends, would provide markets with an indication of the future direction of monetary policy, an idea first floated by Treasury Secretary Scott Bessent last October.
• Trump has yet to begin seriously mulling contenders to replace Powell, but a shortlist of names has been floated in the media since late last year. Top of the list is Kevin Warsh, a former Fed governor. Warsh is viewed by Trump to be straight out of central casting physically speaking and has long spoken out about his desire to narrow the Fed’s focus. Other candidates include current Fed Governor Christopher Waller, who Trump appointed to the position, and director of the National Economic Council, Kevin Hassett.

How Trump Could Remake the Fed. In selecting a new Fed chair, Trump is expected to focus on a nominee better aligned with his preference for a low interest rate environment no matter the macroeconomic conditions, a departure from traditional Fed practice.

• In 2019 and 2020, Trump sought to remake the Fed in his image with the appointments of nontraditional nominees to the Fed Board including Herman Cain, Stephen Moore, and Judy Shelton. Shelton’s nomination failed on the Senate floor due to GOP concern over her history of questioning the value of the Fed’s independence and her interest in returning to the gold standard. Cain and Moore, who similarly lambasted the Fed for its rate hike decisions in a Wall Street Journal op-ed, were both forced to withdraw from consideration due to concerns from GOP senators.
• Faced with a larger 53-47 GOP Senate majority this time around, Trump may have more leeway to get his preferred nominee for Fed chair confirmed. Those prospects are further improved by the retirement of a number of the moderate GOP senators who opposed the nominations of Shelton, Cain, and Moore during Trump’s first term.
• The first test of just how far Trump will go in appointing individuals to the Fed that align with his interest rate views, and just how receptive the Senate’s GOP majority is to confirming them, will come with the expiration of Fed Governor Adriana Kugler’s term in January 2026. Trump’s nominee to replace Kugler will be his fourth appointment to the Fed Board and will offer a strong preview of the nomination fight over Fed chair that is set to play out months later. Of course, even if Trump is able to make appointments to the Fed Board in his image, the challenge, particularly for a future Fed chair, will be to build consensus on the Board around reducing rates even if it is not apparent in the economic data that they should be lowered.

Anchors Aweigh?

White House Actions. President Trump issued an executive order (EO) on “restoring America’s maritime dominance.”

• Trump’s EO lays out a strategy to promote shipbuilding but many of the major points would require Congress to act. Trump directs the Department of Defense (DOD) to leverage Defense Production Act Title III authorities, which include loans and loan guarantees (with congressional authorization) and purchases and subsidies. The EO directs the creation of a Maritime Action Plan within 210 days that includes a Maritime Security Trust Fund, financial incentives, and a proposal to set up maritime prosperity zones modeled after the Tax Cuts and Jobs Act opportunity zones. These changes would need congressional action. The EO also directs DOGE to review DOD and Department of Homeland Security ship procurement for efficiency improvement.
• Trump has outlined an ambitious vision for reviving the US maritime industrial base but bolstering the industry’s low capacity will be a challenge. The White House’s efforts come at a low point for US shipbuilding. Between 2020 and 2022, US shipyards built five or fewer large oceangoing ships per year, compared to over 1,000 in China.
• In addition to boosting US production, the White House is also taking aim at China’s dominance of the maritime industry. The administration recently finalized port fees on ships that are Chinese-built or Chinese-operated. The fee model is scaled back from the original proposal and will gradually increase yearly through 2028. Ordering US-built ships will entitle carriers to a fee suspension.

The Outlook on Capitol Hill. Lawmakers from both parties aim to bolster US shipbuilding, which could help Trump in making portions of his EO a reality.

• Last week, Senators Todd Young (R-IN) and Mark Kelly (D-AZ) and Reps. Trent Kelly (R-MS) and John Garamendi (D-CA) reintroduced the SHIPS for America Act, which would give a boost to the industry. The bill would set up a Maritime Security Trust Fund, increase the share of government cargo required to transit on US-flagged ships from 50 to 100 percent, purchase a new fleet of 250 “commercially viable, militarily useful, privately owned vessels,” and establish maritime workforce incentives. The bill would also include liquified natural gas in the federal maritime fuel tax exemption for ships traveling between US Atlantic and Pacific ports.
• The bill’s bipartisan support gives it a viable path forward in Congress but the costs of building US maritime industrial capacity from its low level may pose a financial hurdle for lawmakers.
• The House Armed Services Committee’s portion of the Republican reconciliation bill also includes billions of dollars to support the defense maritime sector. The legislation would spend $34 billion on shipbuilding and the maritime industrial base, the largest individual share of the total $150 billion Pentagon spending increase. It also includes $2 billion for modernization of Navy depots and shipyards.

Share

Share this...

Facebook

Pinterest

Twitter

Linkedin