A proposed “Mar-a-Lago Accord” to devalue the US dollar is gaining traction, but such a move risks severe economic fallout. A weaker dollar may provide short-term trade advantages, but history shows that currency interventions often yield unintended consequences. Rather than pursuing artificial currency manipulation, policymakers must consider the broader consequences of weaponizing the dollar and reassess the risks of forced devaluation.
A strong dollar aligns with President Trump’s America First strategy by enhancing US purchasing power, attracting global investment, and reinforcing the dollar’s primacy in international trade—strengthening both economic sovereignty and geopolitical influence. Some Trump administration policies, however, have raised concerns about economic nationalism and trade restrictions. If policymakers take an aggressive approach against foreign investors, treating them as adversaries, capital flight could occur just as the economy faces uncertainty from tariffs, spending cuts, and a rapid pullback in both consumer and business sentiment.
The US has long benefited from the “exorbitant privilege” of being the issuer of the world’s reserve currency. America attracts vast foreign investment due to that status, which was gained in the 1944 Bretton Woods Agreement and persists more than 50 years after the agreement collapsed. With nearly $18 trillion in foreign investments in US equities today, a sudden reversal of those inflows could destabilize an already overvalued market.
In the past five years, foreign inflows into stocks have more than doubled, with international investors accumulating American equities at twice the rate of investments abroad. That dependency creates vulnerabilities, though. Should foreign investors assess the risks of exposure to the US dollar to be too great, capital outflows could push bond yields higher and stock prices lower.
Foreign central banks have already signaled concerns, with dollar-denominated reserve asset growth over the past seven years staying essentially flat. Private foreign investors have pushed some $10 trillion into US assets since the pandemic, most of which has gone into stocks. Continued flows depend upon stability and strong returns, both of which are likely to be compromised in a regime characterized by aggressive currency policies. Unlike central banks and governments, private investors are sensitive to competitive returns and relative valuations. If these investors retreat due to devaluation fears or punitive policies, the resulting selloff could destabilize markets at a time when valuations are already elevated.
The Plaza Accord of 1985 offers a cautionary tale. While it successfully depreciated the dollar, it led to unintended distortions. Japan, a key participant, saw its currency appreciate sharply, triggering an asset bubble and decades of stagnation. A similar strategy, today, would present even greater risks in light of the size and interconnectedness of global markets.
A weaker dollar also raises borrowing costs for the US government and private sector. Emerging market investors have already expressed concerns about capital seizure risks, reducing their appetite for US government and agency securities. If those fears are compounded by explicit currency manipulation, Treasury markets could face falling demand, driving up yields, spiking debt service costs, and undermining financial stability.
One proposed element of the Mar-a-Lago Accord includes “terming out” US debt by swapping existing obligations for for ultra-long term (perhaps century) bonds underwritten by Federal Reserve liquidity guarantees. But with $36 trillion in debt and ballooning deficits, private investors are not likely to swap short-term, liquid instruments for less liquid, high-duration assets. Even Stephen Miran, the author of the proposal, acknowledges that private investors cannot be forced to extend Treasury maturities. Capital flight from US financial markets means higher yields and credit constraints, which ultimately stifle growth–ironically, planting the seeds of the kind of crisis the accord seeks to prevent.
Addressing trade imbalances needn’t be destabilizing. Foreign capital plays an essential role in financing American innovation and growth via financial markets, and policies that threaten the inflow risk undermining asset prices, driving up borrowing costs, and eroding confidence in the US as an investment destination. As US financial markets incur mounting risks, investors will seek alternatives abroad.
A forced dollar devaluation is not a solution; it is a gamble. Rather than seeking the quick and uncertain route of currency manipulation and punitive foreign investment restrictions, structural economic changes fostering innovation, capital efficiency, and sound fiscal policy are necessary. Artificially shifting market dynamics rarely ends well. The lessons of the Plaza Accord are clear: interventionist currency policies create short-term winners and long-term losers but inevitably weaken the economic foundations they aim to strengthen.
