03-16-2026
Daniels School Distinguished Fellow Joe Tracy, a nonresident senior fellow at the American Enterprise Institute and formerly with the Federal Reserve Bank of Dallas, sat down with Daniels Insights recently to discuss the dollar, exporting and importing and more.
The dollar is the world’s main reserve currency, which gives the U.S. an “exorbitant privilege.” We can issue debt in our own currency, avoid exchange‑rate risk on that debt, and have much of our currency held abroad as an official or unofficial second currency. A strong dollar also underpins our ability to use financial sanctions by limiting access to the dollar‑based payment network, though overusing sanctions pushes other countries to seek alternatives.
People hold dollars because they trust it as a store of value and as a widely accepted means of exchange. That trust rests on belief in the U.S. economy, sound fiscal policy and an independent Federal Reserve that resists pressure to finance government spending by printing money. We do not actively manage the exchange rate; instead, we focus on running the economy well so markets keep the dollar strong. History shows reserve currencies can lose their status — as happened with the British pound after its fiscal position deteriorated — so we should not assume the dollar’s dominance is guaranteed if we mismanage our finances.
The store‑of‑value function is especially important because you have to keep rebuilding and maintaining that trust. People need to believe the dollar has remained strong and that the U.S. government is not going to deliberately devalue it.
Another important point is that we do not actively intervene in the foreign‑exchange market these days. We allow the dollar’s value to be set in the international market, and there is no active, direct policy to peg its value. Administrations have, over time, expressed support for a “strong dollar,” and that is a useful sentiment for markets to hear. But it is not interpreted as a promise to intervene to prop up the exchange rate. What it really means is that the U.S. government is pledging to run itself and the economy well, and in doing so, maintain the value of the dollar.
The underlying faith has been that the U.S. would continue to be the leading economy and thus be able to back up its pledge to stand behind its currency. It also helps that central banks — in our case, the Federal Reserve — have been given an appropriate degree of independence. The Fed’s independence reassures people that it will not simply acquiesce to money‑financed deficits.
It has always been in the U.S. government’s interest to support a strong dollar. We understand that a strong dollar has trade implications, but in the broader scheme, it signals that the U.S. economy is doing well—that strength is what underpins the dollar. It is a short‑sighted view to think that deliberately weakening the dollar would benefit the U.S. economy in the long run. When the economy is doing well, people — both here and abroad — trust the dollar.
If the U.S. economy is struggling or we are resorting to extraordinary measures to prop it up, that understandably makes foreigners nervous about holding dollars. They may wonder what we are doing and whether we ourselves have confidence in our economic future, and they may become reluctant to hold the dollar as a store of value. We therefore need to focus on making the economy more productive and fostering growth. When we succeed, that supports the dollar and also helps us pay down the deficit.
I think the case against that view is that the world has been increasingly integrated in terms of trade and financial systems. Greater trade integration has delivered large global benefits by letting countries specialize in what they do best, lowering costs and raising incomes. As places like China developed, it made sense for them to produce lower‑value goods cheaply while the U.S. moved up the value chain into more complex manufacturing and services. Consumers here benefited from cheaper imports, and workers in developing countries saw rising wages.
Glenn Hubbard at Columbia University, in his book about building bridges, not walls, has argued — with the benefit of hindsight — that while we talked a lot about the gains from free trade, we did not do enough to use those gains to compensate and help those who were adversely affected. These were the communities that were hit hard, that lost many businesses, and the mid-career workers who suddenly had to be retrained. The answer was not to protect every job forever, but to assist people in the transition, and we did not do enough of that.
That failure was probably the seed of a lot of today’s populist resentment of free trade. If we had done a better job helping people adjust, we might have avoided much of that backlash, and there would probably be more acceptance of the idea that “we all benefit,” with the costs not falling so disproportionately on a few.
Strategically, it can make sense to bring some critical production — like key minerals, energy or health‑related supplies — back to the U.S. or to close allies to reduce vulnerability in crises. Firms also learned from the pandemic that ultra‑lean, globally stretched supply chains can be fragile, so building some redundancy, even at a slightly higher cost, can act as insurance against disruptions.
However, a broad push to “manufacture everything here” or to have the government pick industrial winners and heavily subsidize them is risky. Our strength has been relying on relatively efficient capital markets, with the government focusing on long‑horizon basic research (often through universities) rather than micromanaging industries. In addition, attracting and keeping high‑skill immigrants — especially STEM graduates from U.S. universities — would support innovation and growth, but current limits on H-1B work visas make that harder.
There are some successes: foreign automakers, for example, chose to build plants in the U.S. to serve this market directly. But they often located in the South to avoid higher costs and rigidities associated with unionized labor in traditional manufacturing states. That shows policy can influence where factories go, but cost, regulation, labor rules and openness to foreign talent all matter.
Trade agreements like NAFTA were designed so production could move fluidly across North American borders. Different stages of a complex product might be done in the U.S., Canada and Mexico, with final assembly here; that can be more efficient than trying to do everything inside the U.S. These arrangements also raised wages and job opportunities in northern Mexico, which helped reduce migration pressures. If we tighten these relationships unnecessarily or resist needed foreign investment and expertise, we make it harder to expand manufacturing in a cost‑effective way.
