Why the Dollar Is Having Its Worst Year Since 2008, and What It Means For You

The U.S. dollar is having its worst start to a year since 2008 amid growing concern the Trump administration’s unpredictable economic and foreign policies threaten growth.

The U.S. Dollar Index (DXY) declined 4.2% between the start of the year and Friday’s close. That marked the largest decline for the index since 2008 when the index slid 4.8% over the same period as the Global Financial Crisis unfolded.

Nearly all of the dollar’s decline so far this year came over the past week as tariffs on Canadian and Mexican goods went into effect. Even the Canadian dollar and Mexican peso, which theory says should fall on concerns tariffs will plunge the economies into recession, gained against the USD last week. 

European currencies have been the biggest winners of the White House’s economic and political reorientation. The euro is up about 4.5% in the past week, boosted by Europe’s plans to increase defense spending and stimulate the economy in response to America’s increasingly fractious relationship with the continent. 

The weakness comes despite the White House’s desires. “This administration [and] President Trump are committed to the policies that will lead to a strong dollar,” said Treasury Secretary Scott Bessent in an interview with CNBC Friday morning.

So Why Is the Dollar Falling?

It’s counterintuitive for the dollar to weaken in response to U.S. tariffs. On paper, tariffs should lower the value of non-U.S. currencies by reducing America’s demand for them. But a litany of factors, not just the trade balance, drive the dollar’s value, and one of the most significant is the difference between domestic and international interest rates. 

Put simply, the dollar tends to strengthen against other currencies when U.S. interest rates are higher than those in comparable economies. That’s because higher rates make U.S. debt relatively more attractive to investors, and since U.S. debt is denominated in dollars, demand for debt drives demand for the currency.

“When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management. 

The dollar and Treasury yields climbed steadily in the last quarter of 2024 as investors, responding to slowing disinflation progress and a surprisingly resilient labor market, scaled back their expectations for future interest rate cuts. Simultaneously, the global economy was showing signs of strain, particularly in Europe, where the European Central Bank appeared poised to continue steadily cutting rates. 

In recent weeks, a litany of developments in Washington—tariffs, massive cuts to the federal workforce and budgets, and heightened geopolitical uncertainty—have begun to threaten the economic strength that has kept interest rates elevated. Some economists have warned tariffs could initiate a bout of “stagflation,” the combination of slow growth and high inflation. 

With recession risks rising, investors believe rate cuts are back on the table. As recently as mid-February, the majority of investors were expecting the Federal Reserve to cut interests once this year at most. Now, the majority expect at three cuts by the end of the year. 

What Does It Mean For You?

The value of the dollar can influence how tariffs are felt by U.S. businesses and consumers. A weaker dollar can increase the attractiveness of U.S. exports, potentially stimulating economic growth. It would also boost the earnings of multinationals with big business abroad. 

At the same time, a weaker dollar increases the cost of importing goods. Theoretically, that encourages more domestic production, but by all accounts the U.S. doesn’t currently have the manufacturing base to support itself without imports. According to the Commerce Department, just over half of the goods and services purchased in the U.S. in 2023 could be said to be “made in America.” Ramping up domestic manufacturing to increase that share would take time.

If the economic outlook were to stabilize in the coming months, one could expect the dollar to appreciate, which could lower the cost of imports and offset some tariff-related price increases. But as with a weaker dollar, there’s a trade-off: Dollar strength would increase the cost of U.S. exports, weighing on investment in domestic manufacturing.