Trump's tariffs were expected to strengthen the dollar. So why is it the weakest it's been in three years?

CNN

25-06-2025

The US dollar is having its worst year in decades. While stocks have recovered from their April lows and demand for bonds has been relatively steady, the dollar has continued a precipitous decline.
The US dollar index, which measures the dollar's strength against six major foreign currencies, is down nearly 10% this year and on Wednesday hovered around its lowest level since 2022.
Wall Street had expected the dollar to strengthen under President Donald Trump's second term. His policies of tax cuts were expected to spur economic growth and tariffs were expected to reduce demand for foreign imports, boosting the greenback's value.
Yet the dollar had broadly weakened this year as Trump's tariffs — and his back-and-forth decisions on implementing them, pausing them, raising them and lowering them — have injected uncertainty into markets and clouded the outlook for the US economy.
While tariffs can technically boost the dollar, they also have created an uncertainty about US policy that has 'dominated' markets this year, driving the dollar lower, Barry Eichengreen, professor of economics and political science at UC Berkeley, told CNN.
'Investors don't like uncertainty,' Eichengreen said, noting the negative impact on the dollar. While uncertainty around the US economy has increased, the European economy — though facing its own headwinds from tariffs — has emerged as relatively more stable.
'The consensus out there is that US growth is slowing owing to uncertainty around Trump's tariffs and other things,' Eichengreen said. 'The weakness of the dollar may also reflect new doubts about the currency's safe haven status.'
A weaker dollar could support American exporters by making their goods relatively more affordable in the global market. It could also improve revenues for businesses with overseas operations and make visiting the United States relatively more affordable for international tourists.
However, the dollar is weakening at a time when there are heightened concerns about how the White House's 'erratic' policies and the massive US debt load might impact demand for US assets, Eichengreen said.
Republican lawmakers hope to deliver Trump's 'One Big Beautiful Bill Act,' to his desk by July 4. There have already been concerns about foreign investors demanding higher yields to hold US debt due to concerns about the deficit.
Foreign investors buying US debt want a strong dollar to get the most bang for their buck when converting their holdings into their own currency. As the dollar weakens, it eats into foreign investors' return on their investments.
If there is waning demand for the dollar, Treasury yields could rise, increasing the cost of borrowing for both the US government and consumers.
The dollar's decline reflects a crisis of confidence in the United States, said Arun Sai, senior multi asset strategist at Pictet Asset Management.
'If you cannot with certainty take a view on the position of the US administration, it's hard to commit capital,' Sai said. 'What we've seen with the current administration in the last few months is that this notion of the US being a default destination for global capital is being challenged.'
The Trump administration's flip-flopping on tariffs has been 'detrimental to confidence' in the US dollar, according to Sai.
As Trump's tariffs roiled markets in early April, there was a simultaneous drop in US stocks, bonds and the dollar that spooked investors. 'That's very peculiar. It doesn't usually happen in the US,' Sai said. 'For us, that's indicative of a loss of confidence.'
Francesco Pesole, an FX strategist at ING, said the dollar's status as a strong currency and haven that investors turn to during times of stress is being dented.
'It doesn't mean it's going to lose its crown. It doesn't mean that it's going to be substituted entirely. The dollar remains the number one currency in most transactions in the world and is still the most liquid one,' Pesole said. 'However, there is now a case for markets to see that dominance sort of starting to decline at a faster pace than it has in recent years.'
A survey of global fund managers by Bank of America in June showed the lowest exposure to the US dollar since 2005.
Meanwhile, there have been more appealing investment opportunities in Europe. As the dollar has declined and the euro has strengthened, there are compelling opportunities to diversify and invest overseas, said Jason Blackwell, chief investment strategist at Focus Partners Wealth.
International stocks can provide better returns in a weaker dollar environment. 'We can point to our non-US equity holdings and show what that diversification benefit has looked like year to date,' he said.
The euro is up 11.5% against the dollar this year, hitting its strongest level against the greenback in more than four years.
Blackwell said international mutual funds and ETFs are great opportunities to diversify portfolios. He said he sees the decline in the dollar as less of an indictment of the United States and more of a 'positive outlook' for other countries around the globe.