The immediate costs of President Donald Trump’s trade war are fairly clear. Prices for imported goods are rising while economic growth is slowing. Manufacturers are slashing orders, small businesses with Chinese suppliers are on the brink of insolvency, interest rates are rising, Americans’ retirement savings are bleeding value, and consumers are losing confidence. The severity of these consequences remain to be seen. But even the administration’s defenders concede that Trump’s tariffs will entail some economic pain in the near-term.

The real question concerns the long-term impacts of Trump’s misgovernance. The US economy has rebounded from severe shocks twice this century. If neither the 2008 financial crisis nor the Covid pandemic durably reduced America’s living standards, it’s reasonable to suppose that our nation will shake off the effects of Trump’s misrule in due time.

Yet there are reasons to fear that his policies will render Americans permanently poorer — at least, relative to the level of prosperity they might have otherwise attained. Trump’s defunding of scientific research threatens to lastingly hinder US innovation, while his discouragement of immigration could constrain long-term economic growth.

To many financial analysts, however, the biggest risk is that Trump could permanently reduce the value of the dollar.

Currently, the US dollar is the world’s reserve currency — the one used in a majority of the world’s international transactions. To see how this works, consider what happens when a Mexican farmer wants to sell pig meat to a South Korean restaurant chain. The South Korean company probably doesn’t have a ton of pesos in the bank, and the Mexican farmer doesn’t have much use for the South Korean won. The two parties need some medium exchange that is widely accessible, universally trusted, and easily convertible into their local currencies. The dollar is that medium: The South Korean company exchanges won for dollars, buys the pork with those dollars, and then the Mexican farmer exchanges his hard-won greenbacks for pesos.

The dollar’s reserve status keeps demand for America’s currency and debt artificially high, and thus, our nation’s borrowing and consumer costs unusually low.

But Trump’s erratic and belligerent trade agenda has shaken global investors’ confidence in both America’s economic and political stability. Among bankers and foreign governments, talk of “de-dollarization” has spiked.

The dollar’s dominant role in international finance is unlikely to end any time soon. But Trump’s policies have increased the odds of the currency’s future displacement, while driving down its current value.

The Trump trade war’s most surprising downside

What makes the recent decline in the dollar’s worth alarming is that it wasn’t supposed to happen.

Most of the Trump trade war’s adverse consequences were widely anticipated. Tariffs virtually always increase consumer prices, trigger retaliatory measures by other countries, and depress stock values.

But conventional economic wisdom held that Trump’s tariffs would make the dollar more valuable.

To understand why, one needs to recognize that the........

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