Global Currency Devaluation Has Begun

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Global Exporters in Crisis: The Devaluation Race Begins

The effects of America's trade war are now surfacing in unexpected ways, extending far beyond direct tariffs. Central banks worldwide are in a state of panic as the slowing U.S. economy leads to reduced demand for the dollar. Since Trump took office, the dollar has been steadily weakening, approaching its 2014 lows. This marks the third consecutive month of decline, with the trend likely to persist for at least another quarter.

Because global trade is still primarily conducted in U.S. dollars, this depreciation creates a major problem for everyone. For the U.S., a weaker dollar means higher domestic inflation, as imported goods become more expensive. But for major exporting countries, the situation is even worse. When the dollar weakens, their goods—priced in stronger local currencies—become more expensive and less competitive in global markets.

Exporters are now caught between two economic giants. China, which accounts for nearly 30% of global manufacturing value-added at $4.7 trillion, is aggressively improving product quality while driving down costs, undercutting competitors worldwide. Meanwhile, the U.S. is preparing to impose massive reciprocal tariffs. Trump has declared April 2nd as a key date for rolling out these tariffs, claiming a "win-win" scenario: either foreign tariff barriers come down, allowing for fairer trade, or the U.S. collects substantial revenues from new duties.

For global manufacturers, this presents a crisis. Not only is a weakening dollar driving up their own currencies, but they are also facing higher tariffs when exporting to the U.S. If a product is hit with a 20% tariff and American consumers can’t afford the new price, manufacturers have only two options: absorb the loss or devalue their currencies.

Switzerland’s Emergency Devaluation

This dilemma has already forced the Swiss National Bank (SNB) to act. In a surprising move, Switzerland cut interest rates by a quarter point to 0.25%—an alarmingly low level. The official reasoning is to counter deflationary pressures, as inflation dropped to just 0.3% in February. However, the real motive is far more strategic: protecting Swiss exports from Trump’s trade war.

Switzerland, despite its reputation for banking, is heavily reliant on exports, which make up over 75% of its economy. In contrast, China’s export dependency is only 20%, while Canada and Mexico are below 40%. The country's largest trade surpluses come from chemicals and pharmaceuticals, which generated over 60 billion Swiss francs in 2023. Luxury watches and precision instruments follow closely behind.

But the problem is clear: the U.S. is set to impose a 25% tariff on pharmaceuticals, threatening Switzerland’s most valuable export sector. To counteract this, the SNB has resorted to aggressive devaluation. By cutting interest rates and selling off Swiss francs in favor of foreign currencies—particularly the U.S. dollar—the central bank is trying to weaken the franc and keep Swiss exports competitive.

A Global Devaluation Wave Is Coming

Switzerland is not alone. Other export-heavy economies will likely follow suit. Canada, for example, is in a precarious position. Despite the Canadian dollar depreciating over 5% in the past year, it may still not be enough to offset U.S. tariffs. With 78% of Canadian exports going to the U.S., a 25% tariff could cripple key industries. Canada’s trade diversification efforts have fallen short, leaving few alternative markets to absorb the impact.

As more countries face similar pressures, a wave of global currency devaluations appears inevitable. The U.S. dollar’s dominance in international trade means that its fluctuations dictate monetary policy worldwide. While the U.S. public may not immediately feel the effects, countries like Switzerland are already in a race to devalue their currencies or risk economic collapse.

The global trade landscape is shifting fast, and with major economies scrambling to stay competitive, the coming months could see unprecedented currency interventions across the world.

How Currency Devaluation Works

In response to Trump's trade war, many countries are actively weakening their currencies to support their exporters. Understanding how this works is crucial.

Let’s take an example: Suppose the exchange rate is $1 USD = 1.35 CAD (Canadian dollars). A Canadian exporter earning $1 million USD would convert it to 1.35 million CAD.

Now, if the Canadian dollar weakens to 1.45 CAD per USD, that same $1 million USD is now worth 1.45 million CAD—a 7.4% increase in local currency revenue. This allows exporters to lower their selling price in U.S. dollars without losing profit.

For instance, a company selling a machine for $100,000 USD would currently earn 135,000 CAD. But with a weaker currency, they could drop the price to $93,000 USD and still earn the same amount in Canadian dollars. That’s a 7% discount in USD, making their product more competitive in the U.S. market.

The Risks of Currency Devaluation

While devaluing a currency can provide short-term relief for exporters, it comes with significant economic downsides—the most pressing being higher domestic inflation. When a currency weakens, imported goods become more expensive, raising costs for businesses and consumers alike. This affects everything from raw materials to consumer electronics, fuel, and essential commodities. As a result, purchasing power declines, leading to higher living costs and potential social unrest.

Despite these risks, many countries may feel compelled to devalue their currencies to maintain global trade competitiveness. With rising tariffs and shifting trade policies, nations that rely heavily on exports—such as South Korea, Canada, and Australia—could find devaluation to be their most effective defense. The quickest way to weaken a currency is by cutting interest rates, as lower rates reduce the attractiveness of holding that currency, leading to a natural decline in its value. If the global trade war continues to escalate, we may see several major economies resort to this strategy.

The U.S. Dollar: A Global Balancing Act

The U.S. dollar plays a central role in international finance, acting as the world’s reserve currency. This unique position creates a lose-lose situation for many countries:

• If the dollar strengthens, other currencies weaken, making exports from those countries less competitive and triggering currency crises in export-driven economies.

• If the dollar weakens, the purchasing power of U.S. consumers drops, reducing demand for imports and disrupting global trade. This leads to an export crisis for manufacturing-heavy nations like China, Germany, and Japan.

Because global trade is still largely denominated in U.S. dollars, any sharp movement in its value can have far-reaching consequences. A strong dollar forces other nations to devalue their currencies to stay competitive, while a weak dollar can inflate global commodity prices, increasing costs for businesses worldwide.

Is a Weaker Dollar on the Horizon?

The future of the U.S. dollar is uncertain, but if the U.S. economy enters a recession, we are likely to see a significant decline in its value. Federal Reserve Chair Jerome Powell has acknowledged that recession risks are rising, and many economic indicators suggest trouble ahead. If a downturn occurs, the following scenarios are likely:

1. The Federal Reserve will cut interest rates to stimulate the economy. Lower rates make U.S. assets less attractive to foreign investors, weakening the dollar.

2. Investors will sell off U.S. bonds and stocks, fearing slower growth and reduced corporate profits. This capital outflow will further reduce demand for dollars.

3. U.S. consumer spending will decline, leading to lower imports. With fewer dollars circulating in global trade, international markets may experience reduced liquidity and financial instability.

Even Donald Trump has been calling for rate cuts, suggesting that the administration is aware of the economic slowdown. Historically, rate cuts are a sign of economic distress, as they indicate that the government is trying to counteract slowing growth.

A Global Devaluation Wave?

Major financial institutions are already sounding the alarm. JP Morgan estimates a 40% chance of a U.S. recession in 2025, a probability that would have been unthinkable just a year ago. If this prediction holds, the consequences will be far-reaching:

• A weaker dollar will force other countries to devalue their currencies to remain competitive.

• Inflation could rise worldwide, as weaker currencies make imports more expensive.

• Global purchasing power will decline, making essential goods and services less affordable.

This isn’t just a U.S. problem—it’s a globally interconnected crisis. If the world’s largest economy stumbles, no country will be immune. A synchronized slowdown would reduce demand for goods and services worldwide, dragging down growth in emerging and developed markets alike.

The question now is: How much further will the dollar fall?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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