The US dollar is in free fall – but Donald Trump claims it is a good thing.

Since January 19, the greenback has plunged by 3.19pc against a basket of other currencies and is now at a four-year low. On Tuesday alone, it fell again by almost 1pc.

“I think it’s great,” the US president said at an event in Iowa yesterday. “Look at the value of the dollar. Look at the business we are doing. The dollar is doing great.”

His words added further fuel to investor concerns that the Trump administration is keen to weaken the dollar as a way to reduce America’s trade deficit.

Trump is also on a mission to pump up the US stock market, hoping that lower interest rates and more export revenues will juice earnings.

In the past week, as the world reeled from his Greenland tariff salvo in Davos, he talked about how the Dow Jones index was nearing 50,000 points.

He went on to predict that the “stock market is going to double in a relatively short period of time because of everything that’s happening”.

Wall Street isn’t quite so sure. The biggest worry within US markets is that international investors are losing faith in Washington policymaking under Trump.

This could snowball into a threat to both the dollar’s status as the world’s reserve currency and foreign demand for US government debt.

“It is alarming,” says Jonas Goltermann, the deputy chief markets economist at Capital Economics.

What is worrying is not the value of the drop but the speed at which it has happened, Goltermann explains.

The falls are going to keep coming, says Robin Brooks, a senior fellow at the Brookings Institution and a former Goldman Sachs strategist.

“We are only a couple of days into this latest move and the drop in the dollar on Tuesday was bigger than previous days. So I don’t think this move is over yet,” he says.

The value of the dollar could fall by another 2pc or 3pc before it moves into a holding pattern, says Brooks: “Then things are entirely a function of when markets think the Trump administration is next making a major policy mistake.”

One trigger for the dollar’s fall was a fresh signal that the Trump administration wants a weak dollar – something Trump discussed extensively in the run-up to the election as a way to reduce America’s trade deficit.

The weaker dollar would make US exports cheaper for foreigners to buy and imports more expensive for Americans to buy. This could bolster Trump’s project of reviving and reshoring manufacturing to America.

But the dollar’s strength also reflects foreigners’ interest in buying and holding US government bonds. These are traditionally seen as a safe asset, denominated in the world’s reserve currency.

That demand keeps the yield, or interest rate, on those bonds lower. That means the dollar’s strength is linked to the US government’s ability to cheaply finance its ever-expanding budget deficit.

But Trump has a plan. Stephen Miran, his economic adviser – whom the president in September appointed to the Federal Reserve’s board of governors – devised the so-called “Mar-a-Lago accord”, named after his boss’s Florida resort.

If foreign investors sell US treasuries, the Fed could intervene to buy bonds and keep yields low – but that might have to wait for a new Fed chairman.

Another plank of the accord proposes working with partners to coordinate currency interventions that weaken the dollar without destabilising yields. Since Tokyo wants to strengthen the yen, Japan is an obvious candidate.

The US Treasury last week took preliminary steps towards making an intervention to bolster Japan’s falling yen. This would involve selling US dollars, which would weaken the currency.

“That’s a big shift from the way the US has done currency policy for the past 30 years,” says Goltermann.

But analysts warn that the dollar’s precipitous drop in the last week goes far beyond this and draws a clear parallel with the market turmoil seen last April in the aftermath of Trump’s “liberation day” tariffs.

Back then, the dollar plunged by nearly 6pc in three weeks.

“We’re in another moment that feels very similar to April last year. In both cases, the trigger is kind of this perception that policy is just chaotic,” says Brooks.

Trump’s ambition to take over Greenland and his threat to hit a fleet of European nations with new tariffs if they did not cooperate has sparked a wave of jitters among investors facing fresh uncertainty about the world order.

“I think it’s a crisis of confidence,” says Brooks.

Phil Blancato, the chief executive of Ladenburg Thalmann Asset Management, says: “Investors have grown more cautious about US policy risks and political uncertainty. Unpredictable US policymaking is increasing the risk premium on the dollar.”

Foreign investors are not selling their US assets outright but they are hedging their dollar exposure, and this is pushing the currency down, says Blancato.

“Concerns about Federal Reserve independence and fiscal discipline are weighing on longer-term confidence in US policy credibility,” he adds.

The biggest question is if the loss of investor confidence in US institutions spreads to the US Treasury market, warns Goltermann.

If bond investors get spooked, they will demand higher returns, driving up US government borrowing costs at a time when the country’s debt is at a record $38tn (£27.6tn).

“That’s the obvious risk that people are worried about,” adds Goltermann.

“The weaker dollar itself would not necessarily do that. It’s more if you get this loss of confidence in US institutions.”

America’s enormous fiscal deficit, Trump’s weaponisation of the legal system and his attacks on the Federal Reserve could all contribute to a loss of confidence in the Treasury market, he says.

If the investor crisis of confidence in US policy continues, it will begin to damage the dollar’s status as the world’s reserve currency as countries would want to shift away from it, says Brooks.

Trump has massively ramped up his attacks on the central bank for not lowering interest rates more quickly, sparking fears about its ability to set interest rates free from political interference – particularly after Jerome Powell’s term as Federal Reserve chairman expires in May.

The Department of Justice opened a criminal investigation into Mr Powell earlier this month, which the central banker said was a “pretext” for political pressure.

Trump has also tried to sack Lisa Cook, a Fed governor, over allegations of mortgage fraud – a move that has so far been blocked by the Supreme Court.

The president is expected to announce his nomination to replace Powell imminently. If the new chairman favours faster rate cuts, it will be a further drag on the dollar, even if investors are not worried about the Fed’s independence.

David Lubin, a senior fellow at Chatham House, says: “There is a sense that the institutional underpinnings of the US role in the global economy seem to be weakening.”

It is not just investors who are losing confidence in America but the general population. The Conference Board’s consumer confidence index tumbled by 9.7 points in January to 84.5, the lowest level since 2014 – worse than both during the pandemic and in the aftermath of Trump’s “liberation day” tariffs.

Trump’s plan for the dollar may not be working out so great after all.

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