The US Dollar—Strong, Stable, or Weak?

The U.S. dollar index—a gauge of the greenback against a weighted basket of currencies such as the British pound and Japanese yen—has languished this year.

The index has wiped out its post-election gains, tumbling by about 4 percent in the first three months of 2025.

Concerns surrounding economic growth, inflation, and tariffs have driven the dollar’s recent slump.

The Federal Reserve’s rate-cutting cycle has further weighed on the buck.

Market watchers have also attributed the currency’s weakening to foreign developments, such as Germany striking a historic investment package and Japan signaling interest rate hikes.

The sharp decline has sparked questions about the status of the government’s strong-dollar policy.

In the 1990s, then-President Bill Clinton and then-Treasury Secretary Robert Rubin established the policy to attract foreign investment, maintain low inflation levels, and reiterate the greenback’s role as the world’s reserve currency.

The strategy also delivered a message to the world economy that the U.S. economy remains resilient and that the United States is a safe and stable harbor for international investors.

“The ability of governments that have strong currencies to get a weaker one in the short run may be limited, as we have seen in countless examples over the last several years. So what you have to do is work over the long run,” Clinton said in April 1995.

“The United States does want a strong dollar.”

Across the globe, governments, central banks, and investors have showcased their confidence in the U.S. dollar through their exposure and holdings.

While the greenback has ceded ground to other currencies in recent years, the dollar hegemony remains intact amid global turmoil.

Data from the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) suggest the dollar accounts for approximately 60 percent of global reserves, down from close to 75 percent in the early 2000s.

Administration officials, including the Treasury secretary, have expressed support for maintaining the strong-dollar policy.

“What’s important to remember is the dollar, it’s either weak or strong versus something else,” Bessent said in a recent interview with Bloomberg TV.

“So, we want the dollar to be strong. What we don’t want is other countries to weaken their currencies, to manipulate their trade.”

Appearing before the Economic Club of Chicago this past fall, Trump emphasized the importance of keeping the U.S. dollar as the chief international reserve currency.

“If you want to go to Third World status, lose your reserve currency. We have to have that. We cannot lose it,” he said.

On multiple occasions, the president has threatened to slap a 100 percent tariff on countries engaged in anti-dollar activities.

Meanwhile, Trump’s challenge is that a strengthening dollar can adversely affect U.S. exporters and potentially limit America’s manufacturing prowess.

While a robust dollar can mean cheaper production costs and enhanced global competitiveness, it also makes exports more expensive.

When a foreign currency is weaker than the buck, U.S. products are less affordable in global markets, reducing demand for goods made in America.

“The classic argument continues: a strong or a weak dollar. Like most things in life, it is all about maintaining equilibrium,” James Francis, CEO of Paradigm Asset Management, told The Epoch Times.

Continuing the 30-year strong-dollar policy would be a boon for consumers since “it makes your next iPhone upgrade a little less expensive or even your European vacation stay within your reach,” he added.

However, a weaker dollar can bolster foreign demand, enhance corporate profits and GDP, and sustain employment growth.

“Ideally the best scenario is a stable dollar policy that can adapt to the economic cycles,” Francis said.

“Having the dollar flexible enough to support growth and strong enough to maintain its credibility and purchasing power.”

Former Treasury Secretary Steven Mnuchin has echoed this goldilocks scenario: not too strong, or not too weak, but just right.

In an interview with CNBC last month, Mnuchin espoused the policy importance of a stable dollar rather than a strong one.

Although he agreed that the financial markets determine exchange rates, Mnuchin believes the United States will continue outperforming Europe and the rest of the world.

Put simply, according to the Wall Street veteran, the dollar hegemony will persist.

“I think the dollar is the only safe haven to store assets around the world, and I really don’t see any challenge to the dollar, at least in the next 10 or 20 years as the reserve currency,” Mnuchin said.

Based on the IMF’s World Economic Outlook earlier this year, the United States is poised to outpace other advanced economies.

For example, the U.S. economy is forecast to expand by 2.7 percent this year. By comparison, the Euro Area is on track to grow by 1 percent.

Of course, a lot has happened since the institution’s January report, from tariff-fueled market turmoil to adjustments toward growth prospects.

Industrial production rebounded by 0.8 percent in January.

Inflation has slowed toward the European Central Bank’s 2 percent target.

The Centre for European Economic Research’s Indicator of Economic Sentiment surged to an eight-month high and surpassed market expectations.

In the financial markets, various European indexes have outperformed Wall Street.

This year, the UK’s FTSE 100 Index has jumped more than 6 percent.

The German DAX has soared by 16 percent, while the French CAC 40 Index has risen by 10 percent.

STOXX Europe 50 Index, a stock market index that tracks 50 of the largest companies across 17 European countries, has gained 10 percent.

Conversely, the tech-heavy Nasdaq Composite Index and broader S&P 500 have flirted with correction territory (down by 10 percent from their record highs).

The blue-chip Dow Jones Industrial Average is flat year-to-date.

On the currency side, the euro has advanced by 4.5 percent against the U.S. dollar.

Short-term volatility might persist, but the euro is on track for a solid second half, according to analysts at the National Bank of Canada.

“While some of the recent appreciation is likely overdone considering a still ambiguous growth and geopolitical outlook, we expect the European currency to head towards a stronger footing in the second half of this year,” they wrote in a research note.

While Europe has experienced near-term gains, the broader economic outlook is still up in the air, says Fei Chen, CEO and investment strategist at financial services firm Intellectia.

“With that, however, more long-term structural headwinds—like inflexibility of labor markets and diminished innovation—are still present,” he told The Epoch Times.

“There is justified optimism, though sustainable recovery will depend on continued reforms and demand abroad.”

Another roadblock could be U.S. tariffs.

The European Central Bank projects that 10 percent levies imposed by both the United States and the euro area could trim the bloc’s GDP by as much as 1.2 percent over the year.

Despite the implications of these tariffs, the institution’s economists believe the risks are “manageable.”

“Overall, while the U.S. shift towards protectionism introduces new economic risks, its impact on the European economy remains manageable if appropriate policy responses are adopted,” central bank economists wrote in a paper.

“The ability of European institutions to navigate these challenges—by avoiding unnecessary policy mistakes and leveraging macroeconomic tools effectively—will be the key determinant of economic resilience in the face of rising global trade tensions.”

The European Union delayed implementing its first set of retaliatory tariffs until the middle of April to allow for negotiations.

Ultimately, whether Europe can sustain the current momentum and resolve its underlying issues will be the real test, Francis notes.

“For the next few weeks, we think markets will be dominated by an ongoing pricing out of U.S. exceptionalism as U.S. data slow and hard data likely follow soft data,” they said in a note.

The bank’s economists said that various factors, from a recession to reflation, could bolster or weaken dollar prospects over the next 12 months.

National Bank of Canada analysts think the dollar’s recent depreciation is likely overdone and that haven demand could be resuscitated and offer support for the greenback “at least until Washington clarifies its trade policy” next month.

However, while Trump’s trade policy changes have taken center stage, the Federal Reserve’s monetary stance still lingers in the background.

The Fed left interest rates unchanged for the second straight meeting at the March policy meeting.

Investors widely expect the U.S. central bank to keep the benchmark federal funds rate at a range of 4.25 percent to 4.5 percent at the May meeting.

That said, Federal Reserve Chair Jerome Powell and his colleagues have insisted that they are not in a hurry to lower rates as the economy remains in good shape and monetary policy is well-positioned to respond to a wide array of scenarios.

“For now we see the Fed on hold leaving us with modest U.S. [dollar] weakness on our forecast horizon, mindful that may change,” the RBC economists stated.

Still, in the years ahead, will King Dollar remain resting on its throne, or will it be dethroned?

This has become a hot topic over the past few years, especially as more emerging markets settle bilateral trade in local currencies and diversify their reserves in other assets.

A chorus of experts has stated that the prospects of replacing the greenback are unviable, be it the Treasury market’s vast liquidity or the strong demand for dollar-related assets.

A transition to a multicurrency global economy could be possible and offer benefits, but massive changes would be required, says Kathy Jones, managing director and chief fixed income strategist at Charles Schwab.

“It would require some major structural changes in many regions—such as reducing barriers to trade and investment, along with strengthening protections for investors,” Jones wrote in a February report.

“These changes take time and political will.”

And with Trump threatening to wield the tariff weapon, countries’ ebullience about de-dollarization might be paused for the next four years.