The Strategic Play: How a Balanced US Budget Could Weaken the Dollar and Challenge China

The strength of the US dollar has soared against other major currencies, gaining more than 5% against the Japanese yen and Swiss franc and standing taller than the highs of 2015, 2016, and 2020. While this might seem like a boon for Americans traveling abroad, it presents challenges for international businesses and the wider global economy.

A Double-Edged Sword of Strength

For US companies and even some policymakers, a robust dollar is a mixed blessing. On one hand, it increases purchasing power abroad; on the other, it often comes at the cost of reduced competitiveness for exporters and strains international economic relationships.

The Budget Balancing Act

There exists a potent yet demanding strategy for the US to potentially diminish the dollar's might: balancing the federal budget. This difficult endeavor would lead to a dilution of inflationary pressures and a softening of the dollar. The benefits of such an action could reach beyond simple economics, fostering deeper cooperation among allies and challenging adversaries like China in the continuing economic tug-of-war.

A balanced budget would curtail the unequal exchange of dollar reserves and other currencies, encouraging a shift towards a more collaborative international economic stance reminiscent of the Plaza Accord of 1985. During that time, allied nations cooperated to devalue the dollar, a move that stabilized trade with Japan and reduced the US trade deficit.

Impact on China

China's economic strategy often involves manipulating the yuan to mitigate the effect of US trade policies. However, if confronted with a weaker dollar as a result of a US budget in surplus, China would face a more complex and potentially distressing set of choices in any currency battle.

The Road to 2024

With the 2024 elections on the horizon, political candidates could regard a weaker dollar as beneficial, aligning with the goal of a balanced budget to achieve economic stability and strategic global positioning without endangering the economy's health.

US, Dollar, China