USA Anchor Currency Linked To Anchor Safe Haven

USA Anchor Currency Linked To Anchor Safe Haven Dear Friends:The Cato Institute is pleased to present the newest issue of Research Briefs in Economic Policy — “Trade War and the Dollar Anchor,” by Tarek Alexander Hassan, Boston University; Jingye Wang, School of Finance, Renmin University of China; and Tony Zhang, W. P. Carey School of Business, Arizona State University.Learn more by reading the brief here.In each Research Brief, academic economists summarize their research on key economic policy matters. The topics are highly focused, but the Briefs, published every week, aim at a wide audience. Our goal is to inform, clarify, and enhance economic policy analyses and discussions. I hope you enjoy Research Briefs, and I am grateful for your interest in Cato’s work. Best regards, Jeffrey MironHarvard University and Cato InstitutePresident Trump’s announcement of tariffs on April 2, 2025, and subsequent threats of retaliation abroad triggered an unusual response in financial markets: The US dollar depreciated markedly even as indicators of global stress spiked and stock prices fell. Ordinarily, the dollar appreciates in times of global stress. Our research develops a framework to understand why the dollar has emerged as a global safe-haven and anchor currency and how this role might change under a nationalist trade policy. Our analysis yields two key insights: First, the United States enjoys several financial privileges stemming from the dollar’s status as the global safe-haven currency. Second, the dollar’s safe-haven property, in turn, depends on the link between the US economy and the rest of the world through free trade. A trade war that isolates the United States from global markets severs this link. Our framework identifies a critical threshold: If average tariffs and retaliations exceed roughly 26 percent for an extended period, the euro could become the world’s new primary anchor currency.