Trade War and the Dollar Anchor

Tarek Hassan, Thomas M. Mertens, Jingye Wang and Tony Zhang

No 34332, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a general-equilibrium model in which the safety of a country's currency and the choice of its exchange-rate regime arise endogenously. Calibrated to pre-2025 data, the model replicates the U.S. dollar’s safety premium, low Treasury yields, and its status as the world's anchor currency. Introducing a trade war that isolates U.S. goods markets from the world erodes the U.S. dollar's safety premium, raises U.S. interest rates, and lowers the world market value of U.S. firms. For sufficiently high tariffs, small economies optimally re-peg to the euro, precipitating a phase shift to a euro-centric international monetary system and a global welfare loss. The analysis implies that persistent trade wars may threaten the financial privileges the United States derives from the dollar’s international role.

JEL-codes: E22 E4 F1 F3 G12 (search for similar items in EconPapers)
Date: 2025-10
Note: AP EFG IFM
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