During his 2002 testimony before Congress, then-Federal Reserve Chair Alan Greenspan wryly observed: “There may be more forecasting of exchange rates, with less success, than almost any other economic variable.” Two-plus decades later, predicting the future path of exchange rates continues to pose a challenge, especially as currency matters take centerstage in policy debates.   The dollar was expected to weaken in 2024, with markets initially pricing in six or more Fed rate cuts. Reality, however, played out differently, and the dollar actually rose sharply. U.S. economic growth was more robust than expected and the disinflationary process stalled out in the second half of 2024. Consequently, the first rate cut was delayed till September and the year ended with just three Fed cuts.  Furthermore, the Trump-led Republican sweep in last November’s election led market participants to expect passage of potentially growth-enhancing fiscal measures on the regulatory and tax front. Trade tariffs and restrictive immigration policies, both of which are likely to be inflationary, are also expected to be high on the agenda of the Trump administration. Consequently, Treasury bond yields have risen sharply since the election, providing a boost to the dollar.   Early in 2025, diminished expectations for rate cuts on the back of continued U.S. economic strength and a potential revival of inflationary pressures have led many to forecast a further strengthening of the dollar. Currency traders are betting that the ‘U.S. exceptionalism’ trend (which refers to the post-pandemic outperformance of the American economy and equity markets vis-à-vis its advanced economy peers) will persist for the foreseeable future.   This creates a bit of a conundrum for the incoming Trump administration, which has repeatedly expressed a preference for a weaker U.S. dollar to limit imports and address the persistence of large U.S. trade and current account deficits.   A fundamental open-economic identity posits that, for each individual economy, the difference between total national saving (the sum of private and public sector saving) and gross domestic private investment should equal the current account balance. Simply put, a country with excess national saving will run a current account surplus and be a net foreign lender, and a country encountering a national saving shortfall will experience a current account deficit and be forced to borrow from abroad.  There is considerable debate surrounding the underlying forces responsible for the persistence of U.S. trade and current account deficits. Some have argued that the primary factor is the low level of national saving in the U.S. (often tied to the government’s tendency to frequently run large budget deficits). Proponents of this view note that tariffs are unlikely to bear much fruit if the domestic saving shortfall is not resolved. Martin Feldstein, who chaired the White House Council of Economic Advisers during President Reagan’s first term, once noted that “changes in America’s saving rate hold the key to its trade balance, as well as to its long-term level of real incomes. Blaming others won’t alter that fact.”  Meanwhile, in a recent report, Stephen Miran, the Harvard-trained economist who is expected to chair President-elect Trump’s Council of Economic Advisers, places much of the blame for the persistent trade imbalances on the rest of the world’s insatiable demand for dollar-denominated safe assets. The historical antecedent of this viewpoint is the Triffin dilemma. Robert Triffin had famously questioned the stability of the Bretton Woods arrangement by noting that the sovereign issuing the world’s reserve currency will have to run persistent balance of payment deficits in order to satisfy the rest of the world’s ever-increasing need for global liquidity. Somewhat controversially, Miran argues that the “root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs.” It is likely that both the domestic saving shortfall in the U.S. and the global demand for dollar-denominated safe assets are factors contributing to the persistence of trade imbalances. So, what are the potential solutions?  Miran suggests that, under Trump 2.0, a radical rethink may be on the cards: “Sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally reshaping the global trade and financial systems.”   Such dramatic policy shifts raise the specter of high inflation and global economic turmoil. Can modest and targeted measures help achieve a weakening of the dollar and a reduction in global imbalances?   Domestically, U.S. fiscal consolidation will help alleviate bond market concerns and lower long-dated treasury yields (and contribute to a narrowing of interest-rate differentials). Proposals to enhance government efficiency and reduce wasteful spending are good first steps. However, truly improving the long-term fiscal outlook will require tough and painful choices.  Internationally, a multilateral currency agreement akin to the 1985 Plaza Accord appears unlikely. Less ambitious measures may still bear fruit. Encouraging Bank of Japan (which no longer faces a deflation threat) to reduce its reliance on ultra-loose monetary policy will help curtail distortionary carry trade transactions. Pressuring Chinese authorities to undertake structural reforms to boost domestic consumption and reduce overcapacity will help lower that county’s trillion-dollar trade surplus. Compelling Germany and other EU countries with large trade surpluses to boost domestic investment spending would also help rebalance the global economy.   Vivekanand Jayakumar, Ph.D., is an associate professor of economics at the University of Tampa.