After a roller-coaster 2025 that saw tariff headlines whipsaw global markets, currency traders came into this year expecting calm. Instead, they got another shock.
In recent days, the U.S. dollar sank to its weakest level in four years, tumbling sharply against a basket of major currencies and hitting multi-year lows versus both the euro and the British pound. The greenback fell roughly 3% in about a week—an unusually fast move for the world’s most traded currency—before steadying slightly. Few on Wall Street believe that pause will last.
“Most people would think the dollar should, could, and would weaken further this year,” said Chris Turner, global head of financial market research at ING. “The jury’s out on the timing, but less so on the direction.”
The dollar’s decline is more than just a chart-watcher’s problem. A weaker currency eats into Americans’ purchasing power, raises the cost of imports, and risks pushing inflation higher at home. On a deeper level, the latest slide has revived a long-simmering question: is the dollar’s dominance as the world’s go-to currency starting to crack?
From powerhouse to pullback
For more than a decade, the dollar was on a tear. Its strength accelerated between 2020 and 2022, fueled by America’s post-pandemic rebound and relatively high interest rates that pulled global capital into U.S. assets.
That momentum began to fade last year. The dollar index—an index measuring the currency against a basket of major peers—fell nearly 10% in 2025, its worst annual performance since 2017. Much of that drop came in the aftermath of President Donald Trump’s “Liberation Day” tariff announcements, which rattled markets and raised fears of a renewed global trade war.
This month, the pressure intensified again. Tensions between the U.S. and Europe over Greenland spooked investors, triggering another leg down for the dollar. Losses deepened amid speculation that Washington might tolerate—or even welcome—a weaker greenback, including rumors of potential coordination with Japan to sell dollars and support the struggling yen.
While that talk eased after Treasury Secretary Scott Bessent denied any U.S. intervention, the damage was already done.
Policy uncertainty spooks markets
Analysts say the dollar’s slump reflects growing unease with the direction—and unpredictability—of U.S. policy.
“What markets are reacting to is the haphazard nature of policy in this administration—the escalation, de-escalation,” said Robin Brooks, senior fellow at the Brookings Institution and a former Goldman Sachs FX strategist. He drew parallels between the market backlash to tariffs last year and the more recent Greenland dispute.
“The dollar’s decline is basically markets saying this kind of chaotic back-and-forth hurts the U.S. more than anyone else,” Brooks said.
That sense of instability appears to have changed investor behavior. According to Thierry Wizman, global FX and interest rate strategist at Macquarie, traders who had largely ignored geopolitical noise earlier in the year began reassessing risks once tensions flared so quickly.
“It unnerved people,” Wizman said, noting that alongside the dollar’s fall, bets on future currency volatility have surged.
Global forces add fuel
U.S. politics aren’t the only factor dragging on the dollar. Investors are finding more attractive opportunities abroad as growth prospects improve in parts of Europe and Asia. Meanwhile, turbulence in Japan’s bond market has prompted traders to unwind long-standing strategies that relied on borrowing cheaply in yen to invest in higher-yielding dollar assets.
As those trades unwind, demand for dollars weakens further.
For now, official reassurances from Washington have helped slow the sell-off. But analysts say the underlying uncertainty remains—and that’s what keeps the pressure on.
What it means for Americans
For U.S. consumers, a weaker dollar is a double-edged sword. It can help exporters by making American goods cheaper overseas, but it also raises the cost of imports – from electronics to energy at home. If the slide continues, economists warn it could complicate the Federal Reserve’s battle against inflation.
And then there’s the bigger picture. The dollar’s role as the world’s primary reserve currency has long allowed the U.S. government to borrow cheaply and finance deficits with relative ease. While no one is predicting an overnight dethroning, repeated episodes of volatility and policy uncertainty could, over time, encourage investors and governments to diversify away from the greenback.
For now, the message from markets is clear: the era of an unchallenged, ever-strong dollar is no longer guaranteed—and the next move may still be down.
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