Modeling U.S. Dollar Devaluation: A Dynamic Stress-Test of Trade, Monetary, and Currency Strategies

As global economic pressures mount, the U.S. administration is pursuing a strategic effort to weaken the dollar, aiming to boost exports, reduce reliance on foreign debt, and revitalize domestic manufacturing. To analyze the real-world impact of these policies, I built a dynamic model that stress-tests U.S. monetary and trade strategies. This model, though still a prototype, provides robust insights into how Federal Reserve policies, inflation, and economic shocks impact the USD, investment flows, and global trade.

At the core of this strategy are three key tactics:

1️⃣ Trade Policies & Tariffs – Protectionist policies, including tariffs on key trading partners (Canada, Mexico, China), aim to strengthen U.S. industries but risk driving inflation and weakening the dollar.

2️⃣ Currency Devaluation Agreements – A potential "Mar-a-Lago Accord" (modeled after the 1985 Plaza Accord) could intentionally lower the USD’s value to boost U.S. export competitiveness.

3️⃣ Federal Reserve Pressure – Policymakers advocate for lower interest rates to drive down the dollar, making U.S. goods cheaper globally but increasing inflation risks at home.

Through scenario-based Monte Carlo simulations, the model tests several economic pathways, from a moderate Fed stance to extreme currency collapses. The findings reveal a 55% probability of recession, with 30% of those cases involving a major currency depreciation. Meanwhile, a deliberate U.S. devaluation strategy appears in 15% of runs, showing how government intervention could shape currency markets.

U.S. Economic Scenarios

The above charts display results from a series of models that stress-tests the U.S. strategy to weaken the dollar to boost exports and reshore manufacturing. While still a prototype, the insights are robust—shedding light on how Federal Reserve policies and economic shocks impact the USD, inflation, and investment flows.

📉 Current U.S. Strategy:

Weaken the dollar to make U.S. goods more competitive.

Reduce reliance on foreign debt while refocusing on domestic growth.

Reshape trade through tariffs and currency adjustments.

📊 Key Tactics:

 1️⃣ Trade Policies & Tariffs – Tariffs on major trading partners (Canada, Mexico, China) aim to protect U.S. industries but can weaken the dollar by raising import costs and driving inflation.

 2️⃣ Currency Devaluation Agreements – Talks of a "Mar-a-Lago Accord" could mirror the 1985 Plaza Accord, devaluing the dollar to boost U.S. exports.

 3️⃣ Pressure on the Federal Reserve – Advocating for lower interest rates to weaken the dollar, making U.S. goods cheaper internationally but increasing inflation risks.

📊 Scenario Stress Tests & Key Findings:

 🔹 Ultra-Dovish Fed: Aggressive rate cuts (-1.5%) weaken the USD, drive inflation, and fuel speculation.

 🔹 Neutral Fed: Small rate adjustments keep the USD stable but gradually decline as intended.

 🔹 Ultra-Hawkish Fed: Rapid hikes (+2%) strengthen the USD but slow economic growth.

 🔹 USD Currency Collapse with Recession: A crisis could trigger hyperinflation, capital flight, and shifts to alternative assets.

 🔹 U.S. Recession: Economic downturn could lead to rate cuts, weakening the USD in a controlled manner.

 🔹 Multi-Country Currency War: Global devaluations push the USD down (-1.5%), creating trade instability.

1️⃣ U.S. Recession with Modest Currency Devaluation (55%)

A U.S. recession appeared in 55% of simulations, indicating a significant economic slowdown driven by tightening credit, declining consumer spending, and weaker business investment. Under this scenario, GDP contracts, unemployment rises, and corporate earnings decline, forcing the Federal Reserve to pivot toward rate cuts to stimulate growth. While the dollar weakens moderately, the depreciation remains controlled rather than catastrophic.

Monte Carlo projections revealed that negative growth cycles are the dominant risk in the near term, while KDE analysis suggests that USD fluctuations in this scenario are relatively stable, with no immediate collapse.

2️⃣ U.S. Recession with Significant Currency Devaluation (30%)

In 30% of model runs, the U.S. experienced a recession with a significant currency devaluation. In this case, inflation could spiral, global confidence in the USD declines, and foreign capital exits U.S. assets, accelerating dollar devaluation. The Federal Reserve faces a dilemma—aggressively raising interest rates to stabilize the USD could exacerbate the recession, while lowering rates would fuel inflation further. Under this scenario, the USD can significantly devalue, import prices surge, and Treasury markets face turmoil. Monte Carlo simulations showed that whenever the dollar gets significantly devalued, a recession was almost inevitable, and KDE analysis confirmed a heavy-tailed risk distribution, meaning that while this scenario is extreme, its impact would be severe if realized.

3️⃣ U.S. Administration Devalues the Currency (15%)

Unlike an uncontrolled currency collapse, this scenario represents a strategic devaluation of the USD, engineered by fiscal and monetary policies aimed at improving trade competitiveness. In 15% of model runs, the administration actively pursued a weaker dollar to boost exports, reduce trade deficits, and increase economic competitiveness on a global scale.

This could involve coordinated Federal Reserve rate cuts, expansionary fiscal policy, and direct interventions in currency markets. The result is a controlled, gradual depreciation of the USD, unlike a crisis-driven collapse. However, this policy could backfire if inflation rises too fast or if foreign markets retaliate with their own devaluations. Monte Carlo simulations indicated that this scenario produced consistent declines in USD value, but without the extreme volatility seen in collapse scenarios. KDE analysis suggested that while this is a moderate-risk path, it could lead to long-term inflationary pressures if mismanaged.

4️⃣ Neutral Federal Reserve Policy (15%)

A balanced Federal Reserve stance was observed in 15% of simulations, reflecting a soft-landing scenario where inflation remains controlled and the economy avoids major shocks. This outcome assumes that interest rates remain steady, and the USD stays within historical trading ranges. The Fed maintains credibility, capital markets function smoothly, and business investment continues at moderate levels. Monte Carlo projections showed minimal USD volatility, while KDE analysis highlighted stability within historical norms, suggesting that this is one of the least disruptive scenarios.

5️⃣ Ultra-Hawkish Federal Reserve (10%)

In 10% of simulations, the Federal Reserve raised interest rates aggressively, strengthening the dollar but increasing economic contraction risks. While higher rates attract foreign capital and stabilize inflation, they also increase borrowing costs, depress corporate earnings, and slow GDP growth. Monte Carlo modeling produced moderate USD appreciation in this scenario, but KDE analysis revealed that prolonged tightening typically leads to a later slowdown, increasing long-term recession risks.

6️⃣ Ultra-Dovish Federal Reserve (5%)

The least likely scenario, occurring in just 5% of model runs, involved the Fed aggressively cutting rates to stimulate economic growth. This injects liquidity into markets and fuels short-term stock rallies, but at the cost of long-term inflationary risks. While this scenario weakens the USD, it does not result in an outright collapse unless accompanied by additional external shocks. Monte Carlo simulations showed fewer instances of extreme dollar depreciation, and KDE analysis suggested limited probability density for aggressive easing unless triggered by severe deflationary trends.

🔹 Key Takeaways: How Likely Is a Recession or Currency Devaluation?

✔ 55% probability of a U.S. recession, with 30% of cases involving a significant devaluation

.✔ 15% probability that the U.S. administration actively devalues the USD, using monetary and fiscal strategies to improve competitiveness.

✔ A Neutral Fed policy (15%) represents the most stable outcome, preventing major economic shocks.

✔ Hawkish Fed policies (10%) maintain USD strength but risk triggering a slowdown.

✔ Dovish Fed policies (5%) remain the least likely scenario, suggesting the Fed will only ease if faced with severe deflation risks.

As policymakers and investors assess the evolving landscape, the combination of recession risks and deliberate currency devaluation strategies could shape the next major shift in global finance. If the administration moves toward a weaker USD, the key question will be whether this is managed effectively or leads to unintended inflationary consequences.