The central themes of President Donald Trump’s economic agenda — tax cuts, deportation and higher tariffs — if carried out, could strengthen the U.S. dollar relative to other currencies, compounding an already challenging currency environment for U.S. exporters, economists say.
Tariffs and tax cuts came to define Trump’s economic pitch to voters during the 2024 campaign, and the president has suggested he could begin implementing his trade agenda as soon as Saturday with an initial tranche of tariffs on Canada, Mexico and possibly China.
Trump’s opening tariff salvo in 2018 triggered a cascade of retaliatory action by U.S. trade partners that culminated in export losses for U.S. agriculture that reached nearly $30 billion over the following year and a half, according to the Agriculture Department.
But even absent retaliatory tariffs, agricultural economists are warning that Trump’s economic agenda could worsen an already unfavorable macroeconomic environment for U.S. farm product exporters. The dollar has been near 10-year highs this month; Trump's policies could see it strengthen further, economists told Agri-Pulse, with ramifications even for export sectors spared from tariff retaliation.
The nuts and bolts of currency appreciation
The strength of a currency depends on its demand. When investors flock to the dollar and U.S. investment assets, the currency appreciates, says Stephen Nicholson, a strategist at Rabobank.
“An investor is going to say, ‘Where do I put my money, and where do I get the most bang for my buck?’” he said. After a bout of above-trend inflation, U.S. interest rates are high – higher even than many other central banks – offering investors strong returns and making the U.S. an attractive investment site. Accordingly, the dollar has remained particularly strong in recent years.
Stephen NicholsonThe Federal Reserve won’t cut interest rates until its rate-setting Federal Open Market Committee is satisfied that inflation is falling. The Fed wants to keep the cost of borrowing high to return inflation to, or close to, its 2% target. But Trump’s economic and immigration policy agenda, Nicholson said, won’t help to bring inflation down and could push it even higher.
Deporting migrants, he added, will reduce the pool of low-cost labor. On tax policy, Trump wants to extend the 2017 tax cuts, exempt tips from taxable income and is eying a lower corporate tax rate.
“All of those are inflationary,” Nicholson said. “That doesn't mean that interest rates are going to come down anytime soon.” The Federal Reserve already expects slower interest rate cuts in 2025 than previously projected. As other central banks push ahead with rate cuts, the U.S. dollar could strengthen further.
Trump’s trade policy proposals are also likely to keep upward pressure on inflation. In an analysis published last week, the Tax Foundation estimated 25% tariffs on Mexico and Canada and 10% tariffs on China, as Trump has proposed, would bring in $1.2 trillion in additional tax revenue between 2025 and 2034 and at least some of this tariff burden will be passed along to consumers in the form of higher prices.
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Tariffs also contribute to currency appreciation by depreciating the target countries’ currencies against the dollar, Tanner Ehmke, an economist at CoBank told Agri-Pulse. During Trump’s first term, U.S. tariffs on Chinese products reduced demand for Chinese currency, causing the yuan to depreciate relative to the dollar.
Further, when investors face significant uncertainty in global markets – for example because a major economic power is weighing an across-the-board tariff, or because a U.S. president has floated tariffs as a response to issues as varied as drug imports, illegal migration and ending a global conflict, as Trump has – they flock to a stable currency, usually the dollar, Ehmke said.
This phenomenon was visible during Trump’s first term when the dollar strengthened relative to other global currencies following tariff hikes on a swath of imports, J.P. Morgan analysts said.
“During geopolitical unrest, the dollar is going to typically strengthen because capital flows to the dollar as the safe haven,” Ehmke said. “A whole number of things there are coalescing to support the dollar's value.”
The dollar has retreated slightly from its decade-high in October 2022. But if tariffs are implemented on Feb. 1, as Trump has suggested, “we would probably see the value of the dollar come back up,” Ehmke added.
Some ag exports are more sensitive than others
A strong dollar makes U.S. exports more expensive to foreign buyers and hurts U.S. export competitiveness, Ehmke said.
U.S. agriculture exports are already facing currency headwinds brought on from external economic factors. Brazil’s real hit historic lows in December due, in part, to high government spending and structural problems in its economy. China’s tightly controlled yuan also fell to a 16-month low early this month as it grapples with a real estate crisis and weak consumer spending.
Some agricultural commodities, analysts say, are more sensitive to fluctuating exchange rates than others. Soybeans, both Ehmke and Nicholson said, could be particularly vulnerable, given Brazil, the largest U.S. competitor, has a depreciating currency and growing export capacity.
“That weakening Brazilian real is really going to be a headwind to all of those crops that we also grow,” Ehmke said. Cotton and rice exports are also sensitive to a strengthening dollar for the same reason, he added.
Scott Gerlt, chief economist at the American Soybean Association, said that the U.S. industry has already seen fresh export challenges from the weakened Brazilian real.
Scott Gerlt“Brazil in particular has been really tough one with exchange rates for us,” Gerlt said.
Similarly, U.S. wheat competes with Russian exports in global markets, which has also faced a weakening currency since President Vladimir Putin launched his war with Ukraine. Wheat grows in many countries that are potential exporters if the dollar appreciates, Ehmke said.
“You have a whole host of other countries that can quickly step in and export, because it's the most widely grown crop in the world,” he added.
Nicholson agreed, arguing that because the U.S. is only a residual supplier of wheat, the exchange rate “is going to be felt.”
U.S. corn exports, on the other hand, may be better positioned to weather exchange rate shocks, Ehmke said. Mexico accounted for more than 40% of total U.S. corn exports last year, according to USDA data, and the short supply chain, simplicity of sending exports across the southern border and favorable trade conditions under the U.S.-Mexico-Canada Agreement make the country a reliable buyer. The Mexican peso continues to weaken against the dollar, Ehmke said, but corn exports to the country are expected to remain strong in the 2024-2025 season.
The magnitude of the dollar’s appreciation will depend on the scope and design of Trump’s economic policies — including whether tariffs are targeted to fulfill specific policy objectives or applied broadly to U.S. imports as a revenue-raiser. But Nicholson pointed out that even under some of the more sweeping proposals, a spike in U.S. dollar value could be short-lived. As supply chains and trade flows adjust to new tariffs, other countries’ currencies will strengthen against the dollar, he said.
“Markets acclimatize and they normalize,” Nicholson added.
Ehmke said it is also possible that currency markets are bracing for the most sweeping version of Trump’s tariff proposals — an across-the-board tariff, say, or a 60% tariff on China. If that’s the case and the new administration instead imposes narrow or targeted tariffs, the U.S. currency could hold its value or even depreciate somewhat.
“But we don't know. There's so many unknowns,” Ehmke said. “Tariffs have been promised, but will they be actually delivered, and to what degree?”
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