The dollar is weakening. In simple terms, that means that one dollar buys less, especially when compared to another currency, such as the euro. A year ago, on February 2, 2025, the dollar and euro were very close to parity. One dollar would buy 0.98 euros. Today, one dollar buys 0.85 euros. Buy 0.73 British pounds and 0.78 Swiss francs.
On the contrary, one dollar buys 155 Japanese yen.
Overall, the dollar has been falling since January 2025, when it closed above 109, and has recently fallen to a four-year low, down about 11% from last year.
What does this mean for the dollar you spend or invest?
Tim Murray, capital markets strategist at T. Rowe Price, believes there are four main reasons why the dollar will continue to fall after almost 16 years of steady appreciation.
Tax concerns: The size of the national budget deficit puts pressure on the dollar as debt concerns rise.
Monetary policy: Expectation that there will be more cuts from the Federal Reserve. The market anticipates that new Federal Reserve chair nominee Kevin Warsh will implement rate cuts while “virtually every other central bank is done,” Murray told Yahoo Finance. “The interest rate differential makes the dollar weaker.”
Political politics is holding back foreign demand: President Trump “is taking a little bit more of a transactional approach to foreign policy,” Murray said. That has led some countries to hold more of their foreign reserves in other currencies or gold, reducing demand for the dollar.
Capital flows: When stock prices or asset values ​​in other countries exceed those in the United States, capital begins to move to those countries. Gold is another asset in demand. “If you look at the long-term charts of central banks, the amount of foreign exchange reserves that were in gold can still increase further. It used to be much higher,” Murray noted.
Read more: How to invest in gold in 4 steps
Robin Brooks, senior fellow at the Brookings Institution’s Global Economics and Development program, wrote in a recent Substack column that the dollar’s decline in April 2025, at the start of Trump’s reciprocal tariffs, was 6%. “The current settlement is less than half, so there is still a lot of downside,” Brooks wrote.
“The fact that there was no significant decline means that the hurdle to a move away from the dollar is high because there is no alternative. President Trump’s invocation that dollar weakness is welcome will only accelerate what is already a sharp decline. There is much more room for dollar weakness,” Brooks added.
Murray agrees: “If you look at where the dollar is compared to its entire history, even after the recent weakness, it’s still quite expensive relative to its history and its history against most currencies.”
What will be the impact of a weaker US dollar? Murray lists three negative effects and one possible positive effect.
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Imported goods may be more expensive, which, combined with tariffs, could increase inflation.
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Foreign travel costs may increase.
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Oil prices often rise when the dollar weakens because its international price is quoted in dollars. However, recent price movements have been more correlated with international political tension.
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American manufacturers who export products may find their products a little cheaper to sell abroad. “I think that’s one of the reasons why Trump probably won’t be as bothered by a weaker dollar, because if we really want American manufacturing to have a renaissance, then a weaker dollar helps achieve that,” Murray added.
Both Murray and Brooks dismiss concerns that the falling dollar will cause a rise in Treasury yields.
“A weaker dollar loosens global financial conditions and, if anything, increases demand for Treasuries from (emerging market) central banks. Therefore, a repeat of the April 2025 bond market tantrum is highly unlikely,” Brooks wrote.
Read more: What is the 10-year Treasury note?
For investors, Murray said a great way to protect against dollar weakness is to own assets outside the United States.
He pointed to emerging market and local currency bonds. Owning international stocks can also be beneficial, as “the U.S. investor will get whatever the real return on the stock is, plus the currency return. If you look at how international stocks significantly outperformed U.S. stocks last year, most of that actually came from the currency return rather than the real return.”
With the strength of the dollar over the years, some investors stopped holding international stocks in their portfolios. Murray said they could be reallocated again to additional international exposure as the dollar weakens.