What’s going on with the greenback? Why all eyes are on the sinking U.S. dollar as Trump starts second year

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While there are downsides to a weaker greenback, it would fit with Trump’s drive to reduce imports and shore up homegrown industries through tariffs and could, at least in theory, eventually help the government deal with pressure from its growing debt load, which now stands at US$38 trillion. Bessent said Wednesday that abandoning America’s strong dollar policy is not the administration’s plan.

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What is the debasement trade and how is it part of what’s going on with the U.S. dollar?

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The debasement trade refers to market positioning around an expected prolonged decline in the value of a currency. An example is buying hard assets such as gold or silver as a substitute for the U.S. dollar, which pushes up the price of the precious metals, Shenfeld said.

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Douglas Porter, chief economist at BMO Financial Group, likened the trade to “de-dollarization” or moving away from the U.S. dollar. “There is no doubt that some countries would like to, and are actively, moving away from the U.S. dollar, which is one of the reasons the currency has softened over the past year,” he said. “And, yes, the recent softening may be (a) small part of that trend. It’s no coincidence that the recent dollar softness erupted after the tensions around Greenland.”

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Gold and silver are surging. What do all these trends mean for Canada?

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U.S. dollar declines are a mixed bag for Canada’s economy and investors. Shenfeld said Canadian equities could get a boost from the rise in precious metal prices, since gold mining stocks have a fairly significant weight on the Toronto Stock Exchange.

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Porter said that while the surge in gold is related to the weakening in the U.S. dollar, it’s not the only driver. “In general, following the big inflation of a few years back, and along with the move by some central banks to diversify away from the U.S. dollar, gold has won by default,” he said. “Of course, that’s been a windfall for the TSX and its miners.”

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What about consumers and businesses?

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If the U.S. dollar falls, Canadian consumers enjoy increased purchasing power of imports from the U.S., but exporters might take a bigger hit from tariffs, said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “

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If the U.S. (dollar) depreciates much further, then the resulting higher value of the Canadian dollar could reduce the ability of our exports to adjust to tariffs,” he said. “It could also make investing in Canada less attractive if (the Canadian dollar) is less undervalued.”

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So far, the U.S. currency decline has merely reversed an earlier weakening of the loonie, and has not been material enough to alter economic forecasts, Shenfeld said. “If it continued, a strengthening Canadian dollar could put a bit of downward pressure on inflation by making imports cheaper, and in turn give the Bank of Canada more room to cut interest rates further if the economy faltered,” he added.

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What does this mean for Canada’s institutional investors?

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There have been discussions over the past year among Canada’s largest pension funds about now to handle their exposure to the U.S. dollar and U.S. assets. Jim Keohane, the former CEO of the Healthcare of Ontario Pension Plan (HOOPP) who now sits on the board of Alberta Investment Management Corp. (AIMCo), said foreign exchange is a concern for funds that invest heavily in the United States.

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“If the U.S. dollar weakens due to the political uncertainty, it can overwhelm the returns you earn on U.S. assets,” he said.

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Jo Taylor, chief executive of the Ontario Teachers’ Pension Plan Board, said in an interview with Bloomberg at the World Economic Forum in Davos this month that his fund had lightened up on the U.S. dollar and treasuries in the first quarter of last year. He attributed that decision to “risk of a deflationary dollar.”