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Rising tariffs and the United States’ retreat from international trade may threaten the dollar’s status as the world’s safe haven and anchor currency along with the benefits that flow from that status, including lower U.S. interest rates and robust investment from abroad, suggests a paper to be discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 25.
“The dollar’s position as the world monetary system’s anchor currency, the relatively low yields on U.S. government debt, U.S. firms’ ability to borrow cheaply in world financial markets, and the ability of the United States to attract a disproportionate share of international investments, all hinge on the dollar’s safe-haven property—its tendency to appreciate in times of global stress,” write the authors, Tarek A. Hassan of Boston University, Thomas M. Mertens of the Federal Reserve Bank of San Francisco, Jingye Wang of Renmin University of China, and Tony Zhang of Arizona State University.
The paper presents a quantitative model, the first of its kind, that examines the potential effects of rising tariffs on the international monetary system. Since World War II, the dollar has been the principal currency used to settle international transactions. Smaller economies in particular have pegged their currencies to the dollar as a buffer against global financial turmoil. The dollar’s safe-haven status allows U.S. companies to borrow at relatively low rates from foreign investors and thus invest more and pay higher wages than would otherwise be the case.
“Inhibiting trade flows to and from the United States through tariffs or other means, weakens the force underpinning the dollar’s special role,” the authors write. “… This loss of its safe-haven status leads to a rise in U.S. interest rates, a drop in the world-market value of U.S. firms, capital outflows, and lower U.S. wages. … Without free trade, the U.S. dollar-centric system may collapse entirely or shift to another target currency.”
U.S. tariffs announced on April 2 and modified in subsequent announcements, along with retaliatory tariffs imposed by foreign governments, amount to symmetric tariffs of roughly 17%, Hassan said in an interview with The Brookings Institution. The model suggests a tipping point of 26% that would either cause the demise of exchange-rate management or a shift to another anchor currency, likely the euro, he said.
“We’re probably still a bit away from the tipping point but the fundamental insight stands,” Hassan said. “The dollar’s status depends on the degree that the U.S. engages with the rest of the world.”
“Our model’s predictions since President Trump’s April 2 Liberation Day announcement imposing tariffs on virtually all countries have borne out pretty well,” he added. (Stock prices and the value of the dollar fell sharply after the announcement and long-term interest rates rose.) “U.S. stock prices have recovered in dollar terms but not relative to stocks in the rest of the world—particularly if you account for the fact that the dollar has massively depreciated,” he said.
Authors
CITATION
Hassan, Tarek A., Thomas M. Mertens, Jingye Wang, and Tony Zhang. 2025. “Trade War and the Dollar Anchor.” BPEA Conference Draft, Fall.
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Acknowledgements and disclosures
The views expressed here are solely those of the authors and do not necessarily represent those of the Federal Reserve Bank of San Francisco or the Federal Reserve System.
David Skidmore authored the summary language for this paper. Chris Miller assisted with data visualization.
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