The greenback is taking a beating these days. No other way to put it, really.
Since mid-April, the US dollar index has slumped nearly 5% against major currencies, with the downward momentum gaining steam in recent weeks. Why? Markets are getting jittery about what a second Trump term means for America's economic future.
"You'll feel it," Trump proclaimed at a recent rally, referring to his economic agenda. Well, currency traders felt something alright—just not the muscular dollar strength his administration might have expected.
I've spent the past decade covering currency markets, and what we're witnessing looks like textbook anticipatory selling. Markets don't wait for policies to actually materialize; they price in possibilities, probabilities, and perceived risks long before inauguration day rolls around.
The situation boils down to what some analysts (myself included) have started calling the "fiscal contradiction problem." It goes something like this: When you simultaneously promise dramatic tax cuts without matching spending reductions, threaten sweeping tariffs, and make comments that undermine central bank independence... well, currency traders get nervous. Really nervous.
Trump's platform includes extending those 2017 tax cuts—remember those?—plus adding new ones. The Committee for a Responsible Federal Budget estimates these plans could pile an additional $7.5 trillion onto federal deficits over the next decade. Combine that with promises to leave entitlement programs untouched, and you've got yourself a recipe for substantially higher government borrowing.
Now, conventional wisdom says tax cuts should actually strengthen a currency by juicing economic growth. Not crazy logic. The dollar did rally after the 2017 tax cuts, after all. But context matters.
Those earlier cuts happened during a period of relative fiscal stability when the Fed was in a hiking cycle. The landscape in 2025? Completely different. We're staring at debt already at 100% of GDP and growing uncertainty about Fed independence going forward.
Then there's the tariff question.
Look, standard economic theory tells us import restrictions generally strengthen a currency by reducing its supply in international markets. But that assumes all other factors remain equal—and when do they ever?
In the real world (the one we actually live in), trading partners retaliate, global growth takes a hit, and inflation climbs. The Chinese yuan has already fallen to a four-month low against the dollar as markets price in potential trade tensions, but apparently not enough to prevent overall dollar weakness.
What's particularly fascinating to me is watching this currency sell-off while bond markets remain relatively calm. Ten-year Treasury yields have risen, sure, but not dramatically. This divergence suggests currency traders are pricing in something specific—not necessarily default risk, but erosion of the dollar's privileged position through policy choices.
The Fed policy angle? Probably the most underappreciated factor in this whole equation.
Trump hasn't exactly been subtle about his interest rate preferences, recently suggesting he might replace Jerome Powell with "someone else that's a little bit more inclined toward my thinking." Central bank independence has been a cornerstone of dollar credibility for decades. Threats to that independence—even just rhetorical ones—make international investors reach for the antacid.
(Speaking of which, I once interviewed a Swiss currency trader who kept a bottle of Maalox on his desk specifically for "US policy announcement days." Said he went through three bottles during the 2018-2019 trade war escalation.)
The ultimate irony in all this? A weaker dollar might actually deliver some of the economic boost Trump is seeking, at least initially. Exports become more competitive, multinationals see foreign earnings translate into more dollars, and inflation gets a little nudge upward. But this comes with real costs—imported goods become more expensive for consumers, partially offsetting any tax cut benefits, and America's financial dominance takes a hit.
Historical parallels aren't perfect, of course. Reagan's early years saw significant dollar weakness before policies and international coordination turned things around. Markets aren't destiny, and implementation often differs dramatically from campaign rhetoric.
For investors trying to make sense of all this... well, it's less about partisan politics and more about practical portfolio positioning. Dollar weakness benefits international stocks, commodities, and companies with significant overseas revenue. It creates headwinds for importers and purely domestic businesses.
The currency markets are sending a pretty unambiguous message about how they view America's fiscal and trade trajectory. Whether you find this message compelling or overblown largely depends on your view of whether practical governance will temper campaign promises.
Either way, as Trump said, you'll feel it—in your wallet, your investments, and your purchasing power.
What remains uncertain is whether we'll feel it as a gentle breeze... or something closer to a financial hurricane gathering strength offshore.
