CIO Mailbag: The Falling Dollar… What’s Behind the Decline?

by Tim Doyle, Chief Investment Officer, CFP®, MBA

In Destiny Capital’s July 2025 Markets & Economy letter, I referenced the fact that the U.S. dollar had declined roughly -10% by mid-year.  This led to a number of readers following-up to ask the question, “What’s causing the dollar to fall?”  Therefore, I thought this would be a relevant and timely question to address in the latest installment of Destiny Capital’s CIO Mailbag. 

As with anything related to the economy and financial markets, the answer to any question involving currencies is somewhat complicated. First, it’s important to note that the U.S. dollar has been in a position of strength since it began to climb around the time of the 2008 Great Financial Crisis.  As you can see in the chart below, the dollar had been on a somewhat rocky ascent from March 2008 through September of 2022.

Source:  JP Morgan Guide to the Markets

What caused this fourteen year surge?  To answer that, it’s important to outline some of the key factors that can push the U.S. dollar higher because these same factors are often relevant when we see the dollar fall. 

Demand for Dollar-Denominated Assets
The dollar is often pushed higher when there is greater demand for U.S. denominated assets like U.S. Treasuries, U.S. stocks & bonds, and so forth.  This is because these assets must be purchased in U.S. dollars so, for example,  a European investor must convert Euros to dollars to purchase a 10-Year U.S. Treasury bond or 100 shares of Apple stock.  What can boost demand for U.S. dollar denominated assets?  Well, we’ll get into that next.

American Exceptionalism
It’s hard to deny the fact that U.S. corporations have largely dominated the global economy and, subsequently, the global stock market for well-over a decade.  Think of some of the names at the top of the S&P 500 Index like NVIDIA, Microsoft, Apple, Alphabet, Amazon, Meta, Broadcom, etc.   These are companies whose products and services have impacted billions of lives across the globe and have shaped the world we live in.  Then consider names at the top of the MSCI All Country World Ex-USA Index like Taiwan Semiconductor Manufacturing, Tencent, Nestle, Novartis, Novo Nordisk, and so forth.  Are those global companies strong?  Sure. Are they in the same league as NVIDIA, Apple, Microsoft, and the rest?  Not by a longshot. Cycles of growth and innovation in the U.S. have led many to claim that we are in a period of American exceptionalism, and this has resulted in an extended period of outperformance of U.S. stocks compared to international stocks as you can see highlighted in red in the chart below.

Source: JP Morgan Guide to the Markets

To give you a sense of the magnitude of this outperformance, in the fifteen years between January 1, 2010 and December 31, 2024, the S&P 500 index has produced a total return of +593% versus just +92% for the All Country World Ex USA Index.  That outperformance spurred substantial demand for U.S. stocks which helped push the U.S. dollar higher.

The Safe Haven Status of U.S. Treasuries
The United States has been renowned for the strength of its economy and the strength & security of its federal government. In economic textbooks, short-term (1-3mo) U.S. Treasuries are often referred to as ‘risk free’ so – in times of elevated uncertainty – global investors tend to flock to U.S. Treasuries as a ‘safe haven’ asset which, in turn, boosts the U.S. dollar due to increased demand.  We saw a flight to safe-haven assets like U.S. Treasuries in the aftermath of the Great Financial Crisis and during the COVID-19 pandemic, which helped strengthen the U.S. dollar.

Fed Policy & Interest Rate Differentials
In addition to the relative safety offered by U.S. Treasuries, investors are also lured by strong yields, particularly if U.S. Treasury yields are higher than can be found through purchasing other sovereign debt. For example, in 2015, the Federal Reserve of the United States began raising interest rates at a time when other central banks kept rates low. These strong relative yields lured investors to U.S. Treasuries, thus causing a surge in demand for the dollar. The same happened in the aftermath of the COVID-19 pandemic as the Fed aggressively raised interest rates in order to combat inflation.  As U.S. Treasury rates rise relative to other sovereign debt, so will demand for the U.S. dollar as investors are lured to U.S. Treasuries due to higher yields.

Relative Weakness in Other Currencies
Over the past fifteen years, we’ve also seen regions across the globe combat domestic struggles, which has influenced the strength of their currencies relative to the U.S. dollar.  For example, Europe has struggled with debt issues, austerity, sluggish growth and political instability (e.g. Brexit).  The Japanese Yen has been influenced by loose Bank of Japan policies and an aging population.  These challenges have made the U.S. dollar a bit more appealing by comparison, thus keeping the dollar in a position of strength.

What is Causing the Dollar’s Decline in 2025?
It was important to outline what has supported the strength of the U.S dollar over the past ten to fifteen years because these same factors apply when explaining the dollar’s decline.  In 2025, the dollar has fallen due to factors including:

• The Global Stock Surge: Investor demand for international stocks has surged, pushing the All Country World Index Ex-USA +12% higher than the S&P 500 Index as-of the end of June.  Eurozone stocks have surged +19% higher than U.S. stocks in 2025, thus increasing demand for foreign currencies like the Euro as investors rotate out of U.S. stocks and allocate to global equities.
  
• U.S. Trade Policy Uncertainty and Potential Economic Impact:  Confidence in the U.S. economy has been shaken due to uncertainty surrounding U.S. trade policy – namely tariffs.  Investors are worried that tariffs could cause a general slowdown in the U.S. economy and could push prices (inflation) higher as consumers absorb the added costs of tariffs.  These factors could provide headwinds for the U.S. economy and could subsequently impact corporate profits and future earnings growth.  If an economic slowdown occurs, we could see demand for U.S. stocks decline, which could impact demand for the U.S. dollar.
  
• Tax Policy & Persistent Deficits:  On July 4th, the Trump administration signed its long-anticipated tax bill. This tax bill is projected to add to the federal deficit over time, thus exacerbating the U.S. government’s issues with spending and debt.  Expanding federal deficits and ballooning public debt could impact investor perception of the fiscal health of the U.S. government.  This could impact the perception of U.S. Treasuries as ‘risk free’ and could subsequently reduce their demand as a safe-haven asset.
  
• Fed Policy & Interest Rates: The Federal Reserve is expected to cut interest rates by potentially 0.50% by year-end 2025.  Meanwhile, other central banks are expected to remain ‘hawkish’ and keep interest rates higher for longer.  This means that interest rate differentials between U.S. Treasuries and other sovereign debt could shrink or be eliminated entirely.  This could reduce demand for U.S. Treasuries while increasing demand for other forms of sovereign debt.
  
• General De-Dollarization By Central Banks:  in recent years, foreign central banks have been diversifying their holdings and reducing dependency on U.S. dollar denominated assets like U.S. Treasuries.  Among other things, this has supported the surge in the price of gold in recent years as the central banks of countries like Poland, China, India, Turkey and others have made substantial investments in gold.  This trend of de-dollarization has reduced demand for U.S. Treasuries and may contribute to the decline in the dollar.
  
• Basic Mean Reversion:  the U.S. dollar has been in a position of strength for so long that many economists have been calling for its decline simply based on statistical probabilities.  In elementary terms – what goes up, must come down.

At Destiny Capital, it has been our view that a decline in the U.S. dollar has been inevitable given the dollar’s relative strength in recent years.  A weaker U.S. dollar also offers some advantages for some.  For example, when considering domestic exporters, a weaker U.S. dollar can make their goods more affordable across the global marketplace, which could increase demand and boost domestic production. 

Regardless, it’s important to be mindful of the factors listed above to ensure that the U.S. doesn’t risk the exalted status of both its strong economy and its stable federal government.  This means that U.S. leaders must be mindful of how deficit spending and ballooning public debt may impact the perception of the financial health of the U.S. and the status of U.S. Treasuries as a safe-haven asset. Politicians must also consider how harsh trade policies (e.g. steep tariffs, harsh sanctions, etc.) may impact the perception of the United States which, in turn, could hasten the de-dollarization that’s been initiated by some central banks across the globe.

Ultimately, we do not believe that the dollar’s collapse is imminent or that the status of the U.S. dollar as the global reserve currency is under threat.  We still believe we are in a time and place of American exceptionalism, particularly as it relates to innovations that drive financial markets which, in turn, should maintain strong demand for the U.S. dollar in the years ahead.

Important note and disclosure: This article is intended to be informational in nature; it should not be used as the basis for investment decisions. You should seek the advice of an investment professional who understands your particular situation before making any decisions. Investments are subject to risks, including loss of principal. Past returns are not indicative of future results.  Advisory services offered through Destiny Capital Corporation, an Investment Adviser registered with the U.S. Securities & Exchange Commission.

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