Is the US dollar’s era of exorbitant privilege ending?

THE US dollar’s global standing is a mixed blessing. Its status as a safe haven and dominant reserve currency lowers the US cost of borrowing – the so-called “exorbitant privilege” – which means more investment, more growth and higher incomes in the aggregate. But the dollar’s strength also leans against the economy’s competitiveness in international trade, which puts some of its producers at a disadvantage. What a shame that, on the face of it, you can’t collect the benefits of a strong currency alongside the benefits of a weak one.

On one interpretation, though, the Trump administration is aiming to do just that. According to a strategy mapped out by Stephen Miran, chairman of the president’s Council of Economic Advisers, it’s possible to nudge the dollar’s value lower without causing long-term interest rates to rise – thus achieving greater competitiveness in trade without surrendering the exorbitant privilege. The key is to change the terms of international trade and finance by using all the instruments of US power.

By itself, declaring a weak-dollar policy might spur a flight from dollar assets and, as a result, sharply higher interest rates. So it’s better, as Miran explained, to start with tariffs. They wouldn’t do much to reduce the trade deficit, because lower imports would mean a stronger dollar, reversing the gain in competitiveness and squeezing exports as well. But this is only the first stage.