Since mid-January, the dollar has fallen 9% against a basket of currencies, a rare and steep decline, to its lowest level in three years — a drop that raises concerns investors may be losing confidence in the U.S.
Currencies rise and fall all the time because of inflation fears, central bank moves and other factors. But economists worry that the recent drop in the dollar is so dramatic that it reflects deeper investment concerns as President Donald Trump tries to reshape global trade.
The dollar’s dominance in cross-border trade and as a safe haven has been nurtured by administrations of both parties for decades because it helps keep U.S. borrowing costs down and allows Washington to project power abroad — enormous advantages that could possibly disappear if faith in the U.S. was damaged.
“Global trust and reliance on the dollar was built up over a half century or more,” says University of California, Berkeley, economist Barry Eichengreen. “But it can be lost in the blink of an eye.”
The sell-off in the dollar has accompanied turmoil in both the U.S. stock and bond markets, with investors selling off shares and Treasuries amid concerns about the impact of Mr. Trump’s tariffs on corporate growth and investment. The S&P 500 remains 14% lower than its most recent peak in February, placing it in correction territory.
“Particularly disturbing is that both U.S. stocks and bonds fall during these periods—a phenomenon common in emerging markets but rare in developed markets and almost never in America,” said Alex Kuptsikevich, the FxPro chief market analyst. “This is an unambiguous signal from traders that trade wars are sharply curtailing the ‘exorbitant privilege’ the U.S. has enjoyed for the past half-century.”
Traditionally, the dollar would strengthen as tariffs sink demand for foreign products.
But the dollar not only failed to strengthen this time, it fell, puzzling economists and hurting consumers. The dollar lost more than 5% against the euro and pound, and 6% against the yen since early April.
To be sure, many investors don’t think the dollar will be pushed quickly from its position as the world’s reserve currency, instead expecting more of a slow decline. Some experts say the dollar’s decline may be due to its overvaluation, rather than any underlying changes in the strength of the U.S.
The dollar “has been overvalued for too long,” said Eurizon SLJ Capital in a research note. “All over Europe, we have for years been seeing a tsunami of American tourists, because it was cheaper for an American to fly to Europe to ski than to an American resort 2 hours from home … A correction in the dollar is just and healthy.”
But even that is concerning enough, given the benefits that would be lost.
The dollar’s power
With much of world’s goods exchanged in dollars, demand for the currency has stayed strong even as the U.S. has doubled federal debt in a dozen years and does other things that would normally send investors fleeing. That has allowed the U.S. government, consumers and businesses to borrow at unnaturally low rates, which has helped speed economic growth and lift standards of living.
Dollar dominance also allows the U.S. to push around other countries like Venezuela, Iran and Russia by locking them out of a currency they need to buy and sell with others.
Now that “exorbitant privilege,” as economists call it, is suddenly at risk.
“The safe haven properties of the dollar are being eroded,” said Deutsch Bank in a note to clients earlier this month warning of a “confidence crisis.” Added a more circumspect report by Capital Economics, “It is no longer hyperbole to say that the dollar’s reserve status and broader dominant role is at least somewhat in question.”
Impact on travelers and imports
As any American traveler abroad knows, you can buy more with a stronger dollar and less with a weaker one. Now the price of French wine and South Korean electronics and a host of other imports could cost more not only due to tariffs but a weaker currency, too.
And any loss of safe-haven status could hit U.S. consumers in another way: Higher rates for mortgages and car financing deals as lenders demand more interest for the added risk.
More worrisome is possible higher interest rates on the ballooning U.S. federal debt, which is already at a risky 120% of U.S. annual economic output.
“Most countries with that debt to GDP would cause a major crisis and the only reason we get away with it is that the world needs dollars to trade with,” says Benn Steil, an economist at the Council on Foreign Relations. “At some point people are going to look seriously at alternatives to the dollar. ”
They already have, with a little help from a U.S. economic rival.
China has been striking yuan-only trading deals with Brazil for agricultural products, Russia for oil and South Korea for other goods for years. It has also been making loans in yuan to central banks desperate for cash in Argentina, Pakistan and other countries, replacing the dollar as the emergency funder of last resort.
Another possible U.S. alternative in future years if their market grows: cryptocurrencies.
Said BlackRock Chairman Larry Fink in his annual shareholder letter about dollar dominance, “If deficits keep ballooning, America risks losing that position to digital assets like Bitcoin.”
Tariffs and inflation
Not everyone is convinced that a big reason the dollar is falling is because of lost faith in the U.S.
Steve Ricchiuto, an economist at Mizuho Financial, says dollar weakness reflects anticipation of higher inflation due to tariffs. But even if investors aren’t as comfortable holding dollars, he says, they really don’t have much of a choice. No other currency or other asset, like yuan or bitcoin or gold, is vast enough to handle all the demand.
“The U.S. will lose the reserve currency when there is someone out there to take it away,” Ricchiuto says. “Right now there isn’t an alternative.”
Maybe so, but Mr. Trump is testing the limits.
It’s not just the tariffs, but the way he’s rolled them out, with numerous halts and delays. The unpredictability makes the U.S. seem less stable, less reliable, and a less safe place for their money, experts say.
There are also questions about his logic justifying the policy. Mr. Trump says the U.S. needs tariffs to drive down its trade deficits with other countries. But most economists believe those deficits, which measure trade in goods, not services, are a bad measure of whether a country is “ripping off” America, as Mr. Trump puts it.
Mr. Trump has also repeatedly threatened to chip away at the independence of the Federal Reserve, raising fears that he will force interest rates lower to boost the economy even if doing so risks stoking runaway inflation.
That is a sure fire way to get people to flee the dollar. After Fed Chair Jerome Powell said Wednesday that he would wait to make any rate moves, Mr. Trump blasted him, saying “Powell’s termination cannot come fast enough!”