“Understanding the vibe shift on the dollar,” co-authored by Professor of Political Science Daniel McDowell, was published by the Atlantic Council. Following is an excerpt:

There is reason to think that the current dollar “vibe shift” is different and more consequential. Because sanctions risk affects only a small subset of states impacted by U.S. economic penalties, the damage to the dollar’s appeal is contained to that small group, stunting the macro effects of select, country-level de-dollarization. That contrasts with our present moment, where the political forces that seem to be weakening the dollar’s appeal apply far more broadly.

The perception that U.S. foreign economic and security policy is wildly unpredictable has solidified across the world over the last year, including among traditional allies. The world has also watched efforts within the United States to weaken the Federal Reserve’s political independence through unprecedented legal attacks.

Events like these are reshaping widely held perceptions of the United States—and by extension, the U.S. dollar—among official and private investors abroad. This, in turn, could lead to slow but steady reductions in foreign capital flowing into the United States—essentially an extended “sell America” trade—and contribute to a sustained swoon in the currency’s value.

In addition, an experiment with a weaker dollar could also contribute to financial instability. As noted, the current trend of a weaker dollar through the selling of dollar assets affects a broader swath of buyers, especially private investors. If the slide continues, the administration’s mettle and commitment to dollar depreciation may eventually be tested against rising risks in financial markets.