The U.S. dollar has posted its worst first half of the year since 1973. This substantial decline has raised questions about whether it signifies a broader financial decline for America. The dollar has dropped more than 10% against other major currencies this year, marking its worst first-half performance in nearly five decades.
This decline is particularly perplexing given that the U.S. economy remains relatively strong. “America was already great,” says Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management. “We are coming from a very strong dollar level where U.S. exceptionalism was what everybody was speaking about in financial markets,” he adds.
Many investors now fear the decline could reflect a new reality for the U.S., just after the country celebrated its 249th birthday. Chaotic policies and statements from Trump, including tariffs and attacks on the Federal Reserve, have shaken investor confidence worldwide. Additionally, the U.S. debt is ballooning, amplified by a GOP megabill passed by Congress, which introduces concerns about the country’s financial future and political stability.
President Trump’s second term has been markedly different, unnerving many investors both domestically and internationally. The erratic rollout of tariffs has led to widespread business uncertainty. Furthermore, Trump’s interference with the Federal Reserve and Chair Jerome Powell over interest rates has broken long-standing norms of central bank independence.
Kenneth Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard, attributes part of the dollar’s decline to rising U.S. debt, a trend ongoing since the 1990s. “While I wouldn’t read too much into the dollar’s fall this year, there is no question that there is this broader underlying trend of moving away from the dollar — and Trump’s been an accelerant,” he warns. Foreign investors have responded by selling American stocks and bonds, pushing the dollar lower.
Trump tariffs impacting dollar decline
A Bank of America survey of global fund managers reflects this trend, showing a drastic decline in preference for U.S. stocks. Not everyone is convinced that the dollar’s decline is alarming.
Some argue that the U.S. has outperformed global markets for years, and a months-long reversal is merely a readjustment. Additionally, the market adage “TINA,” or “There Is No Alternative,” still holds weight, as the dollar remains the world’s most widely-held currency. There are also benefits to a weaker dollar.
While it makes international travel more expensive for Americans, it boosts domestic tourism and benefits exporters like Apple, which earns a substantial portion of its revenue from abroad. Additionally, a weaker dollar makes foreign products more expensive, benefiting domestic manufacturers. The core question remains: is this decline indicative of a long-term reassessment of the U.S.’s financial standing?
Analysts are cautious of making sweeping judgments, but concerns persist about whether this is a sign that the dollar’s overwhelming dominance might come to an end. Rogoff, who recently published “Our Dollar, Your Problem,” observes that the U.S. has long relied on foreign investments, which have helped make the dollar the world’s reserve currency. However, as U.S. debt levels surge, perceptions could shift.
“The dollar franchise isn’t gone, but it’s weakening materially,” Rogoff asserts. He predicts that over the next 10-20 years, the world could see a “more tri-polar system” with the euro, the Chinese yuan, and cryptocurrencies emerging to challenge the dollar’s dominance. “The dollar’s reserve currency status has been fraying at the edges for at least a decade,” Rogoff says.
“And the process is accelerating under Trump.”
The world watches closely, questioning if this is a momentary blip or the beginning of a significant shift in global financial power.
