The weakening US dollar or "backlash" against Trump's economic agenda is pushing up inflation and hindering the Federal Reserve from cutting interest rates.

The continuous weakness of the US dollar may be becoming a potential challenge for US President Trump and future policies of the Federal Reserve, despite Trump's recent statement to reporters that the dollar is "performing well." Data shows that the US dollar index, measured against six major currencies, has dropped by 2.1% this month, with a total decline of over 9% last year. If the US dollar further depreciates, it could raise inflation risks in the future, impacting not only the Republican economic agenda but also posing a difficult situation for the next Federal Reserve chairman. Trump stated on Thursday that he will announce his nomination for Federal Reserve chairman next week. For a long time, a weak US dollar has been part of Trump's policy stance. He bluntly stated in an interview in 2024, "We have a serious currency problem," and said that the strong dollar has made American products overseas "too expensive and no one buys them." After starting his second term in 2025, Trump also mentioned that he wouldn't openly say he prefers a weak currency, but "a weaker dollar can make more money." The logic behind a weak dollar is that it helps stimulate economic growth and reduce trade deficits. For manufacturing companies such as Carter's Incorporated and other companies with over half of their revenue coming from overseas markets, foreign currency revenue when converted to US dollars will increase profits. Tech companies like NVIDIA Corporation and Micron Technology, Inc. also benefit from this exchange rate effect. However, the risk of a depreciating dollar is that the US may face "import inflation." As the purchasing power of the dollar decreases, goods purchased from overseas, from electronics to cars, will become more expensive. Even though tariff policies may encourage some goods to be produced domestically, the consensus is that the US import scale will remain at a high level in the long term. Joe Kalish, Chief Macro Strategist at Ned Davis Research, warned that Trump's disregard for the value of the dollar could backfire on his economic agenda and even lead to the loss of a majority in the House of Representatives for the Republican Party. He pointed out that the cost of living and affordability issues are the political weak spots for the Republican Party, and recent polls show that as the November midterms near, evaluations of the Republican Party by voters have become unfavorable, with fierce competition for control of both houses of Congress. On the monetary policy front, Federal Reserve Chairman Powell told reporters on Wednesday that the Federal Reserve does not directly discuss the dollar exchange rate, as dollar oversight falls under the Treasury Department. Ironically, if a weakening dollar further raises inflation, the Federal Reserve's policy actions could actually become an important force in supporting the dollar. In December of last year, the US Consumer Price Index (CPI) showed an inflation rate of 2.7%, significantly higher than the Federal Reserve's 2% target. If the dollar continues to decline and brings additional inflation pressure, the Federal Reserve may not be able to continue cutting interest rates as Trump hopes, and may even be forced to raise rates again. Higher rates typically attract foreign capital into dollar assets (such as US treasuries), thereby boosting the dollar exchange rate. Kalish bluntly stated, "The new Federal Reserve chairman may be walking into a trap." Against the backdrop of a depreciating dollar, inflation pressure, and the political cycle intertwining, the Federal Reserve's future policy space may be more restricted, and Trump's economic strategy may face more complex challenges.