The Decline of the U.S. Dollar So Far in 2025
The U.S. stock market has now fully recovered after a sharp correction in April. One thing that’s not recovered, however, is the U.S. dollar, which is down about 10% for the year. Indeed, the weak American dollar has become one of the most interesting market developments this year.
The dollar vs. the stock market
To begin the year, both the dollar and the stock market were in positions of strength, with the S&P 500 near record highs and the dollar at its strongest since 2022, as measured by the U.S. Dollar Index, which compares our currency to a basket of major foreign currencies.
Both stocks and the dollar slumped to start the year, with especially abrupt declines that accompanied the initial announcement of massive global tariffs (which have since been reduced in scope). Since hitting bottom on April 8, U.S. stocks have bounced back strongly, but the U.S. dollar has continued its slide falling an additional 5% in subsequent months.
Before diving into the factors behind the dollar’s decline we must reiterate our mantra that investing and politics don’t mix. The market has upswings and downswings under presidents of both parties, and attempting to invest through a political lens has not been a successful strategy for investors. In fact, the diverging fortune of the U.S. stock market and the U.S. dollar underscores why investing is far more complicated than politics.
Why Is the dollar declining?
We can point to a confluence of current policies that are putting downward pressure on the U.S. dollar.
1. The first factor to consider is the bullish outlook for Europe. Globally, the primary alternative to the dollar is the Euro. The U.S. Dollar Index (DXY) that is commonly followed by financial markets is computed by comparing the dollar to a basket of six other major currencies. The Euro makes up 57% of that basket, followed by the Yen, British Pound, and Canadian dollar with 14%, 12%, and 9% respectively. Thus, when we talk about dollar weakness, we are also often talking about Euro strength.
Optimism in the Eurozone has been a big part of the story in 2025. Germany, in particular, has moved to significantly increase its government spending on infrastructure and defense, boosting the outlook for companies tied to these sectors. The European Union has moved at the bloc-level to unleash spending as well. This includes spending from countries that have historically maintained relatively low debt burdens, that is to say, countries that can afford to spend this way to boost their economies.
2. The next factor to consider is the global trade war. Throughout the trade war, we have cautioned investors to remain mindful that the extent of the tariffs that will ultimately be in place is unclear – it is still the case that the scale and duration of tariffs is uncertain. In recent weeks, the U.S. has announced tentative deals with Japan and the European Union which may reduce the impact of tariffs on the economy. Further deals could follow, or existing deals could unravel.
In theory, a tariff war between countries might have little effect on the exchange rate, with one country’s tariffs offset by retaliatory tariffs. From an exchange rate perspective, it might be a wash. In practice, however, the tariffs have introduced significant uncertainty into the global investing landscape, and many investors have avoided dollar-based investments during the period of uncertainty.
What we can say with confidence is the dollar has gone down steadily throughout the year, during periods when tariff threats were increasing and periods where these threats were being dialed back.
3. A third factor is the continued outlook for massive U.S. deficits. We shared our view in May – when the U.S. government’s debt rating was downgraded – that although the U.S. dollar and U.S. bonds are likely to remain the world’s leading safe haven assets, the debt and deficit outlook has continued to deteriorate for nearly a quarter century, and there’s currently not much prospect for this reversing.
We note this is as much of a political challenge as an economic one. The U.S. has the economic capacity to service its existing debts, but politicians of both parties in Congress and the White House have struggled to make any sustained progress on this issue in nearly 25 years. The recently signed One Big Beautiful Bill Act is expected to be a continuation of a long-running trend.
Considering these three factors together, we see a potent combination of pressures that weaken the U.S. dollar.
So what does a weak dollar mean?
Policies can both strengthen the stock market in the short-term while weakening the dollar. That’s not a criticism. It’s just an observation that we’ve seen play out in real time this year. For those of us who earn dollars and anticipate spending dollars into the future, we can get away with not worrying about every wiggle in the currency market. But that doesn’t mean a weak dollar has no impact.
The weak dollar means that imports are more expensive (international tourism is also more expensive). The combination of a weak dollar – which makes foreign goods more expensive – along with tariffs on those foreign goods, creates a recipe for continued inflation.
For investors, a weak dollar also means that international stocks become more valuable. In January, the dollar and Euro were close to equal in value. Imagine a company generating €1,000 of profit. In January, €1,000 equaled $1,000. Now that the dollar is weaker, the exact same €1,000 is now equal to $1,177 at current exchange rates.
This is a key reason that international stocks have strongly outperformed U.S. stocks this year. Developed market stocks, excluding the U.S., are up nearly 20% year-to-date. This year, international stock allocations have significantly boosted portfolio returns. As we’ve discussed, this is a key reason our portfolios weathered the April slump so well.
Note: In theory, a weak dollar can help U.S. exports, as it means our goods now appear cheaper in foreign countries. In current circumstances, however, this benefit is muted by other countries’ having imposed retaliatory tariffs on U.S. goods.
Takeaways for investors
We conclude with a few takeaways:
1. Remain broadly diversified. The wisdom of broad diversification continues to apply. International diversification is a key strategy that can protect portfolios during periods where the U.S. dollar is weakening. It also positions us to take advantage when other countries have periods of strength. The world is always an uncertain place, but the strategies we’ve put in place should help limit our need to worry if the dollar were to continue to decline.
2. The pressure on the U.S. dollar is significant. A 10% decline in the currency in just a six-month period is quite significant. At some point the tide may well turn back, but for now the combination of international trade tensions, large federal deficits, and European strength continue to put downward pressure on the dollar.
We would note that political pressure on the Fed to lower interest rates could put additional downward pressure on the dollar; we have seen internationally that political interference in central banks tends to result in higher inflation and a weaker currency. At the same time, we caution investors not to get carried away with this observation about a stretch of relatively weak dollar performance — the dollar remains by far the most-used and most-important global currency. A 10% decline in the dollar is hardly the death of the currency.
3. Politics and investing don’t mix. We encourage investors to separate their assessment of whatever is happening with politics from their decisions about their portfolios. The temptation is to believe that when we’re happy with the government everything will go up or if we’re unhappy that everything will go down. Reality can just be far more complex than that. Indeed, the current market environment has provided a reminder that policies and developments that lead to a strong stock market can lead to a weak dollar, certainly in the near-term.
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