The Dollar’s Troubles Are Just Beginning

The dollar index started the year at 109.39 but has since fallen to 97.52. (KIRILL KUDRYAVTSEV/AFP via Getty Images)

The U.S. dollar has fallen 10% since January, bucking expectations that tariffs might move the currency higher. Strategists say that downward trend may be here to stay, despite some recent gains in the dollar.

The dollar has been trading in an unusual pattern since President Donald Trump announced tariffs on Liberation Day, April 2. Like other currencies, the dollar is seen as a barometer of health of the national economy. But the greenback is special in also serving as a haven for the entire world when things are uncertain.

That unique role is now in question. The dollar gained just 1% during the height of Israeli and U.S. attacks on Iran. Similar geopolitical scares have prompted larger flights to safety.

“The game has changed now, and we think there is partly a more structural reason why the dollar remains somewhat dislocated from rate differentials,” said Alex Cohen, Bank of America foreign exchange strategist.

Interest rate differentials measure the gap in rates between two countries or economies and typically influence currency valuation and capital flows. The 10-year German government bond trades around 1.5%, whereas the 10-year U.S. Treasury is near 4.4%. All things equal, that would put upward pressure on the dollar relative to the .

Bank of America data show European and other global investors are selling the dollar, Cohen said. But there is more to the currency moves than simple dollar trading.

Investors have been reacting to the uncertainty around tariffs and “what could be a U.S. administration that is really looking to deglobalize to various degrees,” Cohen said. “You have a foreign pool of U.S. assets that have ultimately been underhedged for a long time,” he said. The administration’s “more isolationist approach” to the world is prompting investors to rethink their hedging.

To be sure, strategists say there has been no mass exodus from dollar assets. There is also no real fear at this point the dollar’s reserve currency status is at risk.

Foreign investors who thought the dollar might continue to strengthen were underhedged because they didn’t really need to hedge in some cases. If stocks sold off, the dollar rose in a flight to safety trade, acting as a natural hedge.

Their long dollar positions also got too extreme.

An unusual pattern has shown up this year, where events like the April 2 tariff announcement prompt stocks, Treasuries, and the dollar to sell off simultaneously.

“That kind of woke the world up to some of these risks that maybe weren’t there previously,” said Cohen.

The administration’s release of letters this week assigning tariff levels to different countries has still not provided clarity about the ultimate tariff rates.

“The markets have responded very mildly,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “They realize this is still a negotiation.”

The Federal Reserve’s interest rate policy also affects the dollar. If the market believes the Fed is more likely to cut rates this year than raise them, the dollar is unlikely to move higher into a lower rate environment.

Strategists say Trump’s criticism of Fed Chair Jerome Powell and any appearance of threats to Fed independence are also factors hanging over the dollar.

Chandler said the dollar took a leg down in late June after the president renewed his attacks on Powell. He refers to the Fed chair as “Too Late Powell” and has repeatedly called on him to reduce the central bank’s policy rate to reduce costs on servicing the federal debt.

Chandler said the dollar edged higher in recent sessions, as the market was reversing that move but that the dollar should continue to slide longer term. “There’s a sensitivity to it,” he said. Trump may not have the legal authority to weaken Fed independence, but “the appearance of doing something wrong” may be enough to affect the dollar, Chandler said.

Trump has said he would appoint a new chair soon, well before Powell’s term expires in May. That nominee couldn’t head the Fed until Powell leaves the chair position but could voice opinions that may impact the market.

The president could also appoint whoever will be the future Fed chair to replace Fed Governor Andrea Kugler when her term expires in January, Chandler said.

Cohen expects the dollar to remain under pressure this year and into next year, though it could see some bouts of strength. The dollar index was at 97.53 Wednesday. It could fall to 90 this year, Chandler said.

In foreign exchange, “the trend lasts for a long time, and we’re just finishing up a long-term up-trend in the dollar,” said Chandler. The dollar index peaked in 2022 at 114.80, capping an uptrend that began in 2008, he said.

So the slide could continue for a long time.

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