Yahoo Finance

Key Takeaways

• The U.S. dollar has declined more than 4% since the start of the year, its biggest drop over this period since 2008.

• Increasing recession risks have put interest rate cuts back on the table this year; interest 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 businesses; 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 having its worst start to a year since 2008 amid growing concern the Trump administration’s unpredictable economic and foreign policies threaten growth.

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

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

European currencies have 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 increase defense spending and stimulate the economy in response to America’s increasingly fractious relationship with the continent.

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

So Why Is the Dollar Falling?

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 reducing 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 significant is the difference between domestic and international interest rates.

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

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