On Tuesday, the dollar reached its lowest point since 2020, with particularly steep declines against the euro and the pound, dropping around 3% in roughly a week. While the slide has since slowed, analysts warn that the temporary pause is unlikely to last, with many expecting further weakness ahead.
“Most people would think the dollar should, could, and would weaken further this year,” said Chris Turner, global head of financial market research at ING. “The jury’s out on the timing but less so on the direction.”
A weaker dollar is not without consequence. It erodes Americans’ purchasing power, particularly for overseas travel and imported goods, and could stoke inflation if the trend continues. But the implications run deeper than consumer spending. The dollar’s prolonged strength has underpinned its role as the world’s dominant reserve currency, helping to keep US borrowing costs relatively low. If the dollar’s decline persists, it raises broader questions about whether its global primacy could be challenged.
What’s Driving the Dollar Down?
The dollar has been on a downward trajectory after more than a decade of strength, with especially pronounced gains between 2020 and 2022. During that period, robust post-pandemic growth and relatively high US interest rates boosted investor demand for the currency. But in 2024 the dollar index—the benchmark tracking the greenback against a basket of currencies—fell almost 10%, marking its worst annual performance since 2017. Much of that drop occurred in the aftermath of Trump’s “Liberation Day” tariff announcements last spring.
This month, the dollar slid further amid rising tensions between the US and Europe over Greenland. The currency’s losses accelerated again this week amid speculation that the US might take actions to weaken the dollar, including coordinated intervention with Japan to support the yen, which has been under pressure.
Analysts argue that the dollar’s decline reflects growing market concern about the Trump administration’s policy approach.
“In my opinion, what markets are reacting to is just sort of the haphazard nature of policy in this administration—the escalation, de-escalation,” said Robin Brooks, senior fellow at the Brookings Institution and former FX strategist at Goldman Sachs. He pointed to parallels between the tariff backlash and the Greenland dispute.
The dollar’s decline, Brooks added, “is a reflection, basically, of markets saying this kind of chaotic back and forth hurts the US more than anyone else.”
Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie, said that markets had initially appeared unmoved by geopolitical concerns earlier in the year. But the rapid escalation of trade tensions over Greenland changed that, unsettling investors and raising bets that the dollar will be vulnerable to further volatility.
Beyond policy uncertainty, other forces are at play. Improved investment opportunities overseas have drawn capital away from the US. In recent days, a sell-off in the Japanese bond market prompted some traders to unwind positions designed to profit from the yen-dollar spread, adding downward pressure on the dollar. US Treasury Secretary Scott Bessent’s denial of any US intervention to support Japan helped stabilise the currency this week, but analysts say uncertainty remains over what the administration may do next.
Where Is the Money Going?
The shift away from the dollar has fuelled a surge in gold prices, which have doubled over the past year as investors seek a safer store of value. Meanwhile, other currencies have begun to benefit from redirected funds. The euro and the pound strengthened against the dollar this month, and eleven of the 19 emerging-market currencies tracked by Oxford Economics gained more than 1%.
There are also signs that global investors may be rethinking their exposure to US assets. Pension funds in Amsterdam and Denmark have reportedly reduced holdings of US Treasuries. However, ING’s Turner cautions that the market is still far from a full “sell America” narrative, noting that the sell-off has been largely confined to the dollar. The US stock market remains near record highs, and movements in US government debt markets have been relatively contained.
Still, ING expects the dollar to fall another 4% to 5% this year, as growth prospects outside the US improve.
Does Trump Want a Weaker Dollar?
For now, the dollar’s decline remains modest enough that the impact on American consumers is likely to be limited to “noise,” according to Brooks. But the future trajectory will depend on US economic performance and the pace at which the Federal Reserve cuts interest rates.
Trump has been campaigning for quicker and deeper rate cuts, and is expected to appoint a Fed chair sympathetic to that view in the coming months. If interest rates fall, the dollar could weaken further as investors chase higher returns elsewhere.
The White House may not see that as a problem. Trump and other officials have previously welcomed a weaker dollar, arguing it could make US exports more competitive. “It doesn’t sound good, but you make a hell of a lot more money with a weaker dollar... than you do with a strong dollar,” Trump said in July. This week, when asked about the dollar’s fall, he said he thought the currency was “doing great.”
Brooks cautioned that a sustained dollar decline could boost US firms, but only if it reflects sound economic conditions. If the drop is driven by market concern over poor policies, he warned, “that is probably a very important signal.”
In that case, the dollar’s slide could be more than a short-term market adjustment—it could be a warning sign about the longer-term direction of US economic policy and global confidence.