The greenback is singing the blues

The hurly-burly in Washington has the potential to reshape the global political and economic landscape, but will it knock the US dollar from its preeminent perch? Some are viewing the plunge of the dollar index since President Trump’s announcement of tariffs as a sign it will.

The argument itself conflates two concepts. One is that the greenback has not been acting as a safe haven for the better part of 2025. The other is the overblown notion that it will soon relinquish its title as the world’s reserve currency. Both theories sit within the large Venn diagram of currency, but do not overlap themselves nearly as much as people assume.

When dollar weakness emerged in January 2025, one could point to traditional economic drivers and a return to mean. In the last quarter of 2024, the US economy proved strong while Europe’s contracted, pushing the Dollar Index (DXY) from around 100 in September to nearly 110 in the early days of the new year. We viewed this move with suspicion, and when the US/Europe economic dichotomy started to reverse, it was clear the dollar had become overvalued. Yet it remained a haven currency.

But what should have been a steady return to typical foreign-exchange undulation turned into a full-fledged tumble when, nearly simultaneously, the Trump administration imposed tariffs on its North American neighbors and Germany announced fiscal expansion. Both events provided the fuel for relative valuations to favor Europe. The so-called Liberation Day on April 2 exacerbated the situation, which we had feared would happen. Tariffs could have been positive for the dollar, with the caveat that the levies were not egregious. But egregious they were. The dollar quickly relinquished its status as a harbor during stormy markets and geopolitical events.

Here is where the confusion arose. Questioning a currency’s reserve standing is a far leap from questioning its temporary position in the shifting exchange-rate ecosystem. But the US dollar’s reserve status is dependent on many factors, from America's robust and liquid capital markets to its military strength; from its political stability to its ability to pay its debts. Unfortunately, the last two have faltered this year. Investors—domestic and foreign—are beginning to view the US as less able to shield them from price variance and other factors, especially due to the size of its federal budget deficit and national debt. The US Treasury market is the proxy for the dollar here, and if investors begin to demand higher term-premia, it would suggest a loss of confidence that may be impossible to regain. The result could be damaging, as it would make it more expensive for the federal government to pay down debt and harder to stabilize the dollar's value.

The dollar likely will remain king for many years, even decades. But it might cost us more.