The US dollar extended its slide against other major currencies on Monday. This is the latest indication that investors may be beginning to shun what was the safest shelter in the global financial markets.
Even as US stocks and bonds recover, the dollar-tracking index against a basket of key trading partners fell for the fifth day in a row. The dollar has dropped by about 8% this year, trading near its lowest level in three years.
There has been a particularly sharp decline since President Trump announced tariffs on imports in almost every country a few weeks ago. The dollar has lost its value on euros, yen, pounds and many other currencies, making American imports more expensive for Americans, even before tariffs apply.
Many investors and Trump's advisors hoped the dollar would be strengthened as tariffs were introduced, given the traditional wisdom that taxation would discourage imports from purchasing and reducing demand for foreign currency. Treasury Secretary Scott Bescent argued that dollar appreciation is important enough to offset the rise in inflation.
In an interview with Bloomberg on Monday, Bescent tried to push back concerns about the recent weakening of the dollar, saying it was still a “strong” and a “global reserve currency.”
But the magnitude of the tariffs announced by Trump is more important than many expectations, unleashing a violent turbulence that is strong enough to raise questions about whether US assets have lost their luster. On multiple days in recent weeks when dollars were on sale, US stocks and government bonds were a combination that Evercore ISI vice-president Krishnaguha said was “rare, ugly, worrying.”
In part, the confusion reflects confusion over Trump's tariff plans. The mixed messages about exemptions and suspensions, and which products and countries could be hit by new tariffs, rattle investors, such as the US Treasury, who have long seen dollar-controlled assets as the most reliable financially.
“Both institutional investors and central banks must start thinking about what will happen if the dollar and financial markets are no longer a safe haven,” said Joe Brusseras, chief economist at consulting firm RSM.
Sharply moving the value of the dollar serves as a central pillar of the financial system and thus can have a volatile impact on the global economy. According to the International Bank of Settlements, the dollar is on one side of almost 90% of all foreign exchange trade, from large companies using credit cards to large companies that make billion-dollar acquisitions, according to International Bank of Consolidation. Important goods like oil are usually priced in dollars, regardless of who is buying and selling.
Brad Sesser, a senior fellow at the Council of Foreign Relations who previously worked for the Treasury, said there is a reason he doesn't read much about the sale of dollars.
For nearly a decade, US assets have been one of the best performers in the world. Consider the S&P 500 and NASDAQ a record-highest “magnificent seven” high-tech stocks.
“A lot of the money that comes to the US hasn't come to the US looking for safety. It's coming to the US following the US stock run for yield,” he said.
“In that context, when there's a general move to reduce risk — because the world certainly appears to be risky after Trump's tariff announcement. The US is rewinded, where some of the money it was bet on US outperformance, continues to offer massive returns.”
Economists see a much higher probability of a recession in the US as trade tensions are intensifying. That could mean that at some point the Fed will be forced to commence interest rate cuts to protect the labor market. When rates go low, it is not attractive for the dollar to hold sectarian assets and could put more pressure on the currency. Given that inflation is poised to rise as growth slows, bars for future cuts appear high, but signs of the economy rushing towards a recession could change central bank approaches.
If that happens, Fed Gov. Christopher J. Waller would support the reduction rate “quickly and significantly” than initially expected, he said Monday. In his speech, he also acknowledged the turbulence caused by Trump's tariffs, saying, “It's an understatement to say that financial markets didn't respond well.”
The dollar will become even more volatile if Trump tries to undermine the Fed's independence. Becent said Monday that monetary policy is a “jewel box that must be preserved.”
Trump will have the opportunity to choose a new Fed chair after Jerome H. Powell's term expires in May 2026. The administration will begin the process in the fall, Bescent said.
But even Sesser admitted there might be something more fundamentally concerning about the dollar slide than simply changing expectations about the economic outlook.
“It's not crazy to think that after a period of exceptional policy volatility in the US, the real risk of a recession may lead to some foreign investors wondering whether the US should increase the amount of money that continues to grow,” he said.
