More than tariffs: Behind the US dollar’s decline

Key takeaways

After a decade of strength, the US dollar has fallen 7.5% since the start of 2025.
Investors are worried about trade policies, the resilience of the US economy, and the overall safety of US assets.
Further declines are possible, but the US dollar should hold its critical role as a reserve currency for global central banks and businesses.

The US dollar has taken it on the chin in recent months, and many analysts say the economic and geopolitical backdrop points to continued declines.

Since the beginning of 2025, a number of factors have combined to reduce the value of the US dollar against other currencies. The US Dollar Index, which tracks the greenback against a basket of other currencies, is down 7.5% so far this year.

That decline was especially noticeable during the early April global market turmoil that followed President Donald Trump’s unveiling of aggressive tariffs against dozens of countries. During times of market volatility, global investors usually see the dollar as safe haven. But not this time around.

In the background, analysts point to a confluence of ongoing factors as undermining sentiment in the US dollar. They include concerns about a slowing of US economic growth and higher inflation thanks to higher tariffs, as well as a growing unease among non-US investors about fiscal policy in the United States. That was highlighted this past week, after rating firm Moody’s downgraded the credit quality of the country, sending the US dollar lower after a bounce that accompanied the rebound in the US stock market.

“What‘s important is that investors don’t just see this as an issue related to tariffs,” says Steve Englander, head of global G10 FX Research at Standard Chartered. “It was an issue related to a much broader set of policies.”

Currency market strategists see continued declines in store for the US dollar in the months ahead. A weaker dollar could have implications for markets in the US and abroad. Strategists say international equities could get a boost, while US-based importers could take a hit. Against the backdrop of tariffs, a boost to US-based companies doing business in foreign markets as US goods become cheaper abroad could be muted. However, strategists don’t expect the dollar to lose its status as a global reserve currency anytime soon.

Why has the dollar declined?

A slew of factors influence the value of the dollar, from supply/demand dynamics to trade policy to investor sentiment to the relative strength of the US economy against other countries. High interest rates tend to strengthen the dollar, while high inflation tends to weaken it.

Conventional wisdom says new tariffs should have strengthened the dollar, since the import taxes were expected to reduce spending on goods produced overseas and shrink the trade deficit. A smaller trade deficit would mean the US would need to attract less foreign capital to keep the dollar from depreciating.

Those declines come after more than a decade of strength in the dollar and the seemingly permanent supremacy of US-based assets, and they began well before Trump upended global financial markets with his tariffs. The dollar slid almost 4% over the course of the first quarter, for instance, after soaring 7% in 2024.

“We went into the beginning of the year with a lot of enthusiasm in general about the dollar in the US economy,” explains Thierry Wizman, global currencies and rates strategist at Macquarie. “Most thought the policy agenda coming out of Washington would be amendable to US assets,” he says. He explains that tax cuts, immigration restrictions, and some tariffs were expected to be somewhat inflationary, which would keep the Federal Reserve in a hawkish stance and interest rates elevated.

As early as February, however, the Trump administration’s aggressive tariff regime took investors by surprise, triggering recession forecasts and threatening to upend the outlook for global trade. Weeks of back-and-forths over the tariffs’ implementation also dented investor confidence, and the dollar plummeted. “Global asset allocators simply lost faith in the ability of the US to emit a coherent set of policy measures,” Wizman says. “It was just too much uncertainty associated with US policymaking.” He thinks the flight out of the dollar in April was about diversification.

US debt downgrade

Another significant concern is the sustainability of the US’ fiscal situation. The Trump administration’s next policy priority of sweeping tax cuts and government spending reductions is expected to push already-straining debt to a new extreme.

Last week, Moody’s downgraded the US from its highest rating, citing an unsustainable debt load that doesn’t show signs of easing. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency said. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”

David Mericle, chief US economist at Goldman Sachs, wrote in a note to clients that the downgrade likely won’t prompt forced selling in the Treasury market, but it “highlights the deteriorating fiscal outlook and comes at a time when markets are already attuned to fiscal risks.” In other words, investors are watching closely for signs that the US is not the safe haven it once was, and an increasingly unsustainable debt load could be another red flag. If the US looks risky to foreign investors, interest rates could rise as they demand a higher premium to compensate for that risk.

Could the dollar lose global reserve status?

The dollar’s decline in value this year has been accompanied by a series of alarm bells that it may lose its status as a global reserve currency if other nations decide American currency and debt is no longer trustworthy.

Analysts say that dire outcome isn’t likely. The dollar plays a critical role in the global financial system, and “there are really no alternatives,” explains Samuel Zief, head of global FX strategy at JPMorgan Private Bank. “No other currency or asset really compares to the US dollar in terms of its role in foreign exchange reserves, international trade settlement, invoicing, overall financial infrastructure, and financial market trading.”

While a few dramatic trading days at the beginning of April made investors rightly nervous, the Trump administration’s response shows it was willing to walk back some of its more extreme policies to soothe financial markets. “That‘s why we do think this is more about a recalibration rather than capital flight or anything so hyperbolic,” Zief says.

“There‘s an ongoing search for an alternative to dollar assets, and it just hasn’t been a successful search,” adds Englander.

Will the dollar continue to fall?

Zief expects the recalibration to take the form of a gradually weakening dollar over the medium term as tariffs weigh on the US economy and growth slows to a speed that‘s more in line with growth in the rest of the world. He describes this as a cyclical process, driven in part by the fact that the dollar has appreciated to very strong levels for years. “We don’t think this is a reassessment of the dollar’s role at the center of the global financial system,” he says.

That global loss of confidence will also weigh on the dollar, even if tariffs are walked back and their impact is more muted. “It‘s very hard to imagine that people will forgive and forget,” says Wizman. However, he adds that the dollar remains strong by historical standards, even accounting for its losses over the past few months. “To the extent that we‘ve seen a … drop from the highs of about a few months ago, it‘s not enough to completely unwind the strong dollar that has been ongoing since 2012."

Another factor that will weigh on the dollar in the coming months is an ongoing shift among global asset managers, who appear to be recalculating the risks of staying overweight in US assets in the current environment. That strategy was successful for years, but a reduced outlook for economic growth and doubts about American fiscal stability are now casting a shadow.

“The structural bear case against the dollar has begun to play out: investors are rethinking underhedged asset exposures to the US that could lead to a prolonged valuation adjustment lower,” wrote Bank of America strategists last week.

Bottom line for investors

What matters for Australian investors with US dollar denominated investments is the performance of the Australian dollar against the US Dollar. A US dollar that appreciates against the Australian dollar is good for local investors and adds to returns.

In this case the Australian dollar has bucked the trend with the Australian dollar depreciating against the US dollar so far in 2025. At the start of the year one US dollar was worth $1.61 Aussie. The rate now stands at $1.55 Aussie. This continues a period of weakness for the Aussie dollar which has benefited local investors with US exposure.