The U.S. dollar has been on a decade-long rise, but its winning streak may be coming to an end. The greenback has dropped by 5% since reaching a peak in June, following a decision by the Federal Reserve to lower its key interest rate last month. This potential shift in the dollar’s strength has sparked discussions on the broader economic impact and what it could mean for Americans’ investments and purchasing power.
Donald Trump, the Republican presidential nominee, along with his running mate Ohio Senator JD Vance, has welcomed a weaker dollar as a way to bolster domestic manufacturing. However, with inflation being a central concern for voters as the November elections draw near, questions loom over how a declining dollar will affect everyday financial decisions.
“The dollar is not going anywhere, and it will likely remain the world’s dominant currency for a long time to come,” said Zach Pandl, head of research at Grayscale, a leading crypto asset management firm. “Even so, it is realistic to think that the dollar is much more likely to decline over the coming years after its long stretch of gains, and many investors are preparing their portfolios for that outcome.”
For most of the past decade, the dollar’s appreciation has benefited U.S. assets and lowered the cost of imported goods and international travel, leading to its designation as a positive economic force. U.S. Secretaries of Treasury have long upheld the belief that a strong dollar is in the national interest. However, this belief may be tested as the Federal Reserve’s rate cuts signal a new era for the currency.
The Fed’s September rate cut of half a percentage point, the first in four years, marks a shift in U.S. monetary policy. “The wave of dollar strength had started when the Fed began tightening while interest rates were negative in both Europe and Japan. As a result, the United States became the natural place for large companies and global investors to park their cash,” Pandl explained. But with the Fed cutting rates and other countries like Japan seeing rate hikes, the demand for dollars could weaken.
A key concern surrounding the dollar’s potential decline is the broader economic and geopolitical backdrop. “Fiscal policy under both Republican and Democratic administrations has increasingly involved large deficits and rising public debt,” noted Pandl. Around one-third of U.S. government borrowing comes from overseas investors, and there is a growing risk that international investors may lose their appetite for dollar-denominated bonds.
Politics can also influence the dollar’s standing. Some scholars argue that the U.S. dollar’s dominance is partially due to the country’s military power and foreign policy alliances, which encourage the use of the dollar in international trade and finance. A reduction in U.S. global military commitments, such as support for NATO or bilateral treaties with Japan and South Korea, could encourage foreign governments to diversify away from the dollar.
The aggressive use of financial sanctions by U.S. administrations has also spurred other nations to seek alternatives to the dollar. For example, after Russia’s invasion of Ukraine in 2022, the Biden administration imposed heavy sanctions on the country, which many see as a catalyst for the global search for alternative financial systems.
Despite these challenges, the dollar remains an attractive option for foreign investors due to the strength of U.S. corporations and the country’s innovative startup ecosystem. “Unless these factors were to change, dollar-based assets will remain competitive with overseas alternatives, and any dollar depreciation will likely be gradual,” said Pandl.
For those concerned about the potential decline in the dollar, there are options. Diversifying portfolios into non-U.S. stocks and bonds, investing in gold, or exploring digital assets like bitcoin are ways to hedge against the weakening currency. Pandl believes bitcoin, with its scarcity and blockchain-based infrastructure, could be the best option for those worried about inflation and dollar depreciation.
A recent Harris Poll found that almost 1 in 5 Americans now own bitcoin, although around 50% remain unfamiliar with cryptocurrency. Pandl is optimistic that as financial professionals gain more understanding of bitcoin’s fundamentals, it will play a larger role in investment portfolios.
As the U.S. dollar’s reign as the world’s dominant currency faces new challenges, Americans may need to prepare for a different economic landscape. The upcoming elections, economic policies, and geopolitical dynamics will likely determine the trajectory of the dollar in the years to come.
