What a Weaker Dollar Means for Your Investments

Many Americans see the U.S. dollar’s strength as a sign of our country’s power around the world. But lately, the dollar has gotten weaker compared to other major currencies, reaching its lowest point in three years. This has made some people worry that the dollar might lose its important role in the global economy.

As an investor, it’s helpful to understand how the dollar works in world markets and what makes it go up or down. This knowledge can help you make better choices about your investments. Let’s look at what’s causing these recent changes and what they might mean for the dollar’s future.

A look back at the dollar’s history

The U.S. dollar has been the world’s main reserve currency (the currency that countries prefer to hold and use for trade) for about 100 years. It took over this role from the British pound after World War I. Some investors worry that things like politics, our national debt, trade policies, or new alternatives like China’s currency or digital currencies might threaten the dollar’s top position.

These concerns are real, but they’re not new. Similar worries come up whenever the economy gets uncertain. In the 1980s, people thought Japan’s strong economy might make the yen challenge the dollar. When Europe created the euro in the 2000s, and as China’s economy grew bigger, people made similar predictions. More recently, the rise of digital currencies has made people question whether traditional money like the dollar will stay important.

Even with these concerns over the years, the dollar has kept its central role in world finance through many economic ups and downs. This staying power comes from several strengths: U.S. financial markets are deep and liquid (meaning it’s easy to buy and sell), American institutions are relatively stable, and the dollar continues to be widely used in international trade and investment. Generally, when there’s trouble in the world economy, people still see the dollar as a safe place to put their money.

In our everyday lives, it’s natural to think a strong dollar is always good. When our currency is strong, it makes traveling to other countries cheaper and reduces the cost of things we import from abroad, which can help keep prices down. So when it comes to buying foreign goods and services, having a strong currency helps your wallet.

But a strong dollar also has downsides, especially when it comes to selling our goods and services to other countries. When the dollar is strong, it makes American products more expensive for people in other countries to buy, which can hurt our manufacturers and farmers. This is why some countries are accused of keeping their currencies artificially weak to help their exports sell better.

You can see that the best currency level isn’t just about being strong or weak – it’s about finding the right balance.

What makes the dollar’s value go up or down

Countries handle their currencies in different ways. Some, like the United States and United Kingdom, let their currencies “float freely,” meaning market forces mainly determine exchange rates (how much one currency is worth compared to another). Other countries keep fixed exchange rates by tying their currency’s value to another major currency like the dollar or euro, or keeping it within a certain range. This requires their central bank to step in and isn’t always easy to maintain.

One major factor that affects currency values is international trade. When people from other countries buy American goods and services, they first need to exchange their money for dollars. Generally speaking, this demand pushes the dollar’s value up. The opposite happens when Americans buy more from other countries than we sell to them – the dollar gets sold for foreign currencies.

This is why having a trade deficit (importing more than we export) would normally make a currency weaker. Over the past year, the U.S. imported $1 trillion more than it exported, as shown in the chart. This trade imbalance has continued for many years, partly because central banks and foreign businesses want to hold lots of dollars.

Interestingly, recent tariffs (fees on imported goods) haven’t made the dollar stronger. Economic theory would suggest that U.S. tariffs on foreign goods would reduce imports, which should push the dollar’s value up. However, many companies bought extra foreign goods before these tariffs took effect, and other factors like money flows and political uncertainty also affect the currency.

Trade is just one piece of the currency puzzle. Capital flows (money moving between countries), interest rates, central bank policies, and international lending all contribute to global demand for dollars. The complexity of these interactions explains why currency movements often seem disconnected from simple economic signs.

For example, differences in interest rates are among the most important factors affecting currency values. When the Federal Reserve (America’s central bank) sets rates higher than other major central banks, it typically creates demand for dollars, since investors might move their money to higher-paying U.S. Treasury bonds. In financial markets, this is called a “carry trade.”

Also, concerns about government spending may be weighing on the dollar. With the national debt approaching 120% of GDP (gross domestic product – the total value of goods and services produced) and ongoing budget deficits, some investors worry about whether U.S. fiscal policy can be sustained long-term. While these concerns haven’t reached crisis levels, they add another layer of complexity when valuing the dollar.

The dollar has kept its global leadership role