Why the Dollar Is Having Its Worst Year Since 2008, and What It Means For You

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Key Takeaways

• The U.S. dollar has declined more than 4% since the start of the year, its biggest drop over this time since 2008.
• Increasing recession risks have put interest rate cuts back on the table this year; moment rates are one of the primary drivers of the U.S. dollar’s value.
• A weaker dollar threatens to increase the cost of tariffs for consumers and traffics; it could also stimulate the economy by making U.S. goods and services less expensive for the rest of the world.

The U.S. dollar is keep its worst start to a year since 2008 amid growing concern the Trump administration’s unpredictable economic and unfamiliar policies threaten growth.

The U.S. Dollar Index (DXY) declined 4.2% between the start of the year and Friday’s close. That significant the largest decline for the index since 2008 when the index slid 4.8% over the same period as the Universal Financial Crisis unfolded.

Nearly all of the dollar’s decline so far this year came over the past week as bill of fares on Canadian and Mexican goods went into effect. Even the Canadian dollar and Mexican peso, which theory sways should fall on concerns tariffs will plunge the economies into recession, gained against the USD last week. 

European currencies get been the biggest winners of the White House’s economic and political reorientation. The euro is up about 4.5% in the past week, boosted by Europe’s plans to expand defense spending and stimulate the economy in response to America’s increasingly fractious relationship with the continent. 

The weakness penetrates despite the White House’s desires. “This administration [and] President Trump are committed to the policies that will take the lead to a strong dollar,” said Treasury Secretary Scott Bessent in an interview with CNBC Friday morning.

So Why Is the Dollar Miscarrying?

It’s counterintuitive for the dollar to weaken in response to U.S. tariffs. On paper, tariffs should lower the value of non-U.S. currencies by reset America’s demand for them. But a litany of factors, not just the trade balance, drive the dollar’s value, and one of the most substantial is the difference between domestic and international interest rates. 

Put simply, the dollar tends to strengthen against other currencies when U.S. predisposed rates are higher than those in comparable economies. That’s because higher rates make U.S. debt comparatively more attractive to investors, and since U.S. debt is denominated in dollars, demand for debt drives demand for the currency.

“When the dollar confirms, it means more foreign money is flowing into the U.S. than the other way around,” says Rob Haworth, senior investment design director at U.S. Bank Asset Management. 

The dollar and Treasury yields climbed steadily in the last quarter of 2024 as investors, pitying to slowing disinflation progress and a surprisingly resilient labor market, scaled back their expectations for future rate rate cuts. Simultaneously, the global economy was showing signs of strain, particularly in Europe, where the European Chief Bank appeared poised to continue steadily cutting rates. 

In recent weeks, a litany of developments in Washington—levies, massive cuts to the federal workforce and budgets, and heightened geopolitical uncertainty—have begun to threaten the economic pluck that has kept interest rates elevated. Some economists have warned tariffs could initiate a stint of “stagflation,” the combination of slow growth and high inflation. 

With recession risks rising, investors believe speed cuts are back on the table. As recently as mid-February, the majority of investors were expecting the Federal Reserve to cut interests in the good old days this year at most. Now, the majority expect at three cuts by the end of the year. 

What Does It Mean For You?

The value of the dollar can wires how tariffs are felt by U.S. businesses and consumers. A weaker dollar can increase the attractiveness of U.S. exports, potentially stimulating economic spread. It would also boost the earnings of multinationals with big business abroad. 

At the same time, a weaker dollar rises the cost of importing goods. Theoretically, that encourages more domestic production, but by all accounts the U.S. doesn’t currently contain the manufacturing base to support itself without imports. According to the Commerce Department, just over half of the goods and marines purchased in the U.S. in 2023 could be said to be “made in America.” Ramping up domestic manufacturing to increase that share order take time.

If the economic outlook were to stabilize in the coming months, one could expect the dollar to appreciate, which could discredit the cost of imports and offset some tariff-related price increases. But as with a weaker dollar, there’s a trade-off: Dollar muscle would increase the cost of U.S. exports, weighing on investment in domestic manufacturing.