Why the Value of the Dollar is Slipping and Why It Matters

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3:16Well, the value of the U.S. dollar has been slipping. And this story is up against a bunch of other doom and gloom headlines. So it could have gotten lost. But it's really, really important because while it might sound like something that only economists or bond traders need to worry about, the value of the U.S. dollar is one of those big macroeconomic forces that trickles right down into our wallet. And while this is breaking news, you probably already noticed it. So today I'm going to do a deep dive on what the heck is going on with the dollar, why it matters, and how it affects you. And as you've already guessed, it's way more than just currency exchange rates.

3:52The dollar has fallen about 8 % this year and is now trading at a three-year low. This drop is showing up in the dollar index, which is a metric that tracks the dollar against a basket of other major foreign currencies like the euro, the yen, and the British pound. That's a big move in just a short period of time. So what changed? Well, a lot of recent movement traces back to tariffs. As we know, President Trump announced sweeping tariffs on imports from nearly every single major trading partner, and that has spooked investors in a big way. But the tariffs were actually supposed to help the U.S.

4:28economy. The thinking was these tariffs would make foreign goods more expensive, which might slow demand for those imports. While the stock market wasn't into tariffs, slowing demand for those imports could in theory strengthen the dollar. But instead, the opposite happened. The scale of the tariffs and the uncertainty about who would be hit and how hard just created turbulence. Investors started selling off U.S. assets and then pulling money out of the country, which weakened the demand for the dollar. So how does a weaker dollar affect us? Well, the side effect that normally gets brought up first is more expensive international vacation.

5:04So if you're planning a honeymoon in Italy, if so, I am jealous, even though you will have to pay more for that outprawl spritz. If you're traveling abroad, the dollar simply won't go as far. But there are other side effects, too. Imported goods get more expensive, whether it's French wine or Chinese electronics. Prices on foreign goods rise as the dollar loses strength. Even before tariffs kick in, we're already seeing this at checkout. And then as the dollar weakens, foreign investors might pull their money out of the U.S. market, which could lead to less demand for stocks and bonds and then more volatility.

5:38So fun. The happy story, though, is that U.S. exports become cheaper abroad. So if you're a business owner that sells overseas, that could be good. Foreign buyers get more bang for their buck, which could boost your sales. But for those of us back home, a weaker dollar also means mounting inflation pressure. If the dollar keeps weakening and exports stay pricey, that feeds into inflation. You've probably heard this described as imported inflation. I want to double click on that last point because it's easy to confuse a weakening dollar with inflation, but they're not the exact same thing, even though they do go hand in hand.

6:14The value of the dollar is really contextual. When you think about the value of the dollar, you're talking about how it stacks up against other currencies in the global market. So think one U.S. dollar getting you few euro or yen. Inflation, on the other hand, measures how much more expensive goods and services are within the U.S. economy itself. When the dollar weakens internationally, it can also contribute to inflation domestically because imported goods then become more expensive. But inflation can also rise for unrelated reasons to the dollar, like supply chain disruptions or rising wages or, I don't know, a pandemic.

6:49So net-net, a falling dollar affects what your money is worth abroad, while inflation affects what your money can buy at home. But to really unpack what would need to happen in order for the value of the dollar to rise, we need to talk about how the dollar gets valued in the first place. The U.S. dollar is a fiat currency, which means that it's not backed by gold or any physical commodity. Its value comes from the fact that the U.S. government says it has value, and the global economy agrees. But the market is what really sets the price. The dollar's value is driven by supply and demand, just like anything else in a capitalist economy.

7:24There are five big levers that affect the supply and the demand of the dollar. First, a hot topic right now, interest rates. When U.S. interest rates are high, foreign investors want to bring their money back to the United States to get those better returns. That increases demand for the dollar and it pushes up the dollar's value. When rates are low, though, there is less demand and a weaker dollar. The second thing is inflation. High inflation makes the dollar less valuable at home and abroad because it erodes purchasing power. 3. Economic performance. A stronger U.S. economy with solid growth and low unemployment tends to attract foreign capital, which then boosts the dollar.

8:024. Market sentiment. This one is more psychological, but it's just as important. If investors think the U.S. economy is headed for trouble, they're probably going to pull their money out. So less demand for the dollar means lower value. And number five, trade policy and geopolitics. Tariffs, sanctions, other government policies can spook or attract, depending on what they are, investors. Uncertainty, though, is a killer for the U.S. dollar. So you do the math between tariffs, inflation, interest rates. It is a perfect storm for the dollar. But even though the dollar is at a three-year low, this isn't the first time the dollar has taken a hit.

8:42In the early 2000s, after the dot-com bubble burst and the Fed slashed interest rates, the dollar weakened significantly. And then during the 08 financial crisis, the dollar initially dropped as global markets panicked, but then recovered as investors flocked to the safety of U.S. treasuries. And most recently during the pandemic, the dollar fell sharply as uncertainty soared, only to rebound when the U.S. rolled out a juicy stimulus package and vaccines faster than other countries. What's happening right now, though, is a bit different. The dollar's weakness is not coming from traditional financial crises, but from policy volatility and trade-related fear.

9:20Economists are now seeing higher odds of a recession due to this trade war and tariff impact. If the economy slows down, the Fed might cut interest rates to cushion the blow. But that would only further weaken the dollar, creating this feedback loop of inflation and volatility. And if the White House meddles with Fed policy, that is another big red flag. I'm going to be talking about that more tomorrow. But markets depend on trust in U.S. institutions. If investors start doubting that the Fed can act independently, the dollar could take another nosedive. As Brad Setster, a former Treasury official, put it, the world might just be asking whether putting more money into the U.S.

10:03is worth the risk. And when confidence wavers, that's when currencies take a hit. For today's tip, you can take straight to the bank. If you're planning a big overseas purchase like luxury goods or a destination wedding or even importing inventory for your small business, consider opening a multi-currency account with a fintech bank or a brokerage. It lets you convert U.S. dollars when the exchange rate is favorable and hold foreign currency until you're ready to spend it. That way you're not at the mercy of a dollar on the exact day of your transaction. So a little currency strategy can help you save hundreds or even thousands of dollars over time.

10:43Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.

11:26Thank you.