U.S. Dollar Plummets 1% as Trump's Tariff Threats Fuel Economic Uncertainty

The U.S. dollar has fallen to its lowest level since the beginning of 2023, as concerns over Donald Trump's latest tariff threats and the widening U.S. fiscal deficit have weakened the currency's appeal. The dollar's decline has been exacerbated by Trump's recent tariff threats against the European Union and Apple, which have heightened investor worries about the impact of his trade policies.

Analysts have expressed concerns that if the U.S. imposes significant tariffs on imports from the European Union, it could increase the risk of an economic recession and add to policy and economic uncertainty. Despite Treasury Secretary Steven Mnuchin's assertion that the U.S. could reach several major trade agreements in the coming weeks, the dollar's downward trend has continued.

Mnuchin has stated that he does not necessarily view the current dollar trend as "weak," as recent volatility in the foreign exchange market is more due to the appreciation of other currencies rather than a weakening of the dollar itself. The decline in the dollar has boosted other major G10 currencies, with the New Zealand dollar and Australian dollar both rising more than 1% against the dollar, followed by the Japanese yen.

Trump's tariff threats pose a double blow to U.S. small banks, which are already grappling with inflation and sluggish economic growth. The combination of these factors, along with the government's aggressive trade policies and rising budget deficits, could exacerbate the pain for these banks and reignite issues that many had thought were resolved.

In 2022 and 2023, "unrealized losses" on U.S. Treasury and mortgage-backed securities became a major concern for lending institutions, as rising interest rates led to the collapse of several banks, including Silicon Valley Bank. Unrealized losses refer to the losses in an investment portfolio that have not yet been realized through the sale or liquidation of the assets.

With the progress of the U.S. government's tax cuts and Mnuchin's renewed tariff threats against non-cooperative trading partners, concerns about the U.S. economic outlook have deepened, and attention has once again turned to the risks facing lending institutions. According to the latest quarterly data from the Federal Deposit Insurance Corporation, the total amount of unrealized losses on bank bonds reached 482 billion dollars in the fourth quarter of 2024, an increase of 118 billion dollars since September.

While unrealized losses may not directly impact banks, they could exacerbate their vulnerability and increase the risk of bank runs if depositors lose confidence. Two years ago, the Federal Reserve ended the banking crisis through a special program. If the White House's policies lead to stagflation, the U.S. may ultimately rely on the Federal Reserve to implement a similar program to rescue small banks. Therefore, the White House may need to reconsider its policies and avoid further entanglement with Federal Reserve Chairman Jerome Powell.