The U.S. Dollar Index — which measures the dollar's strength against six of the world's most widely traded currencies — dropped roughly 11% in the first half of 2025. That was the worst first-half performance since the 1973 oil crisis. By early 2026, the dollar had lost more than 10% of its value compared to the start of 2025.
For context: the dollar actually gained nearly 7% in 2024, supported by elevated interest rates and optimism around pro-growth policies like tax cuts and deregulation. The reversal in 2025 was meaningful — and worth understanding.
Like any asset, the dollar's value is driven by supply and demand. Several forces worked against it in 2025:
Trade policy uncertainty. Tariffs and shifting trade policies made global investors uneasy, reducing confidence in the near-term trajectory of the U.S. economy.
Slower growth forecasts. Expectations of cooling U.S. economic growth reduced demand for dollar-denominated assets.
Rising debt concerns. When government borrowing reaches a level that raises questions about long-term fiscal sustainability, investor confidence in the currency can erode over time.
Federal Reserve rate cuts. In the latter part of 2025, the Fed began cutting interest rates. Lower rates generally make a currency less attractive to foreign investors seeking yield — and that typically puts downward pressure on the dollar's value.
Currency movements can feel abstract — until they show up in your wallet. Here's how a weaker dollar plays out in practical terms:
International travel gets more expensive. When your dollars buy less abroad, trips to Europe, Japan, or South America cost more than they did just a year ago.
Imported goods cost more. When it's more expensive to bring goods into the U.S., those higher costs are often passed along to consumers — contributing to inflationary pressure on everyday purchases.
Purchasing power can shrink. If import prices rise across the board, household budgets feel the squeeze over time, even when wages are holding steady.
There are some upsides, too. A weaker dollar makes the United States a more attractive destination for foreign tourists, whose spending benefits local businesses. It also makes American-made products more competitively priced in global markets, which can support domestic manufacturers and U.S. exporters.
Currency dynamics don't just affect your spending — they can also have a significant impact on investment returns, sometimes in ways that aren't immediately obvious.
In 2025, international stocks significantly outperformed their U.S. counterparts. International equities (as measured by the MSCI World ex USA Index) returned 32.55%, compared to 17.37% for U.S. stocks (as measured by the Russell 1000 Index). Part of that outperformance was a direct result of the dollar's decline — when foreign returns are converted back into dollars, a weaker dollar amplifies those gains.
This is a useful reminder of why geographic diversification matters. A portfolio concentrated solely in U.S. assets can miss the additional opportunities — and potential cushion — that international exposure may provide in certain environments.
Despite its recent weakness, the U.S. dollar remains the world's dominant reserve currency — and by a wide margin. As of 2024, it represented 58% of disclosed global official foreign reserves, far ahead of the euro (20%), the Japanese yen (6%), the British pound (5%), and the Chinese renminbi (2%).
The dollar's reach extends well beyond central bank reserves. Approximately 50% of international financial transactions are conducted in dollars, even when the U.S. isn't directly involved. And roughly 60% of debt issued by foreign firms in a non-home currency is denominated in dollars. U.S. Treasury securities — which form the backbone of global dollar reserves — continue to see strong demand from both foreign governments and private investors.
That said, some central banks and foreign governments, particularly China, have gradually been diversifying a portion of their reserves into other currencies and assets like gold. These are long-term trends worth watching, though they are unlikely to dramatically alter the dollar's global standing in the near term.
Currency movements are notoriously difficult to predict, and reacting to short-term dollar swings is rarely a sound strategy. But a weaker dollar environment is a useful prompt to revisit a few important questions:
Is your portfolio globally diversified? International exposure can offer both return potential and a natural hedge against periods of dollar weakness.
Are you holding too much cash? Prolonged dollar weakness — especially alongside inflation — can quietly erode the purchasing power of idle cash over time.
Does your financial plan account for currency dynamics? If you travel frequently, have international income, or hold significant foreign investments, it's worth discussing how currency fluctuations fit into your overall financial picture.
As always, the right approach is the one that's aligned with your specific goals, time horizon, and risk tolerance — not one driven by short-term headlines.
Disclosures
All investments are subject to market fluctuation, risk, and loss of principal. Investments, when sold, may be worth more or less than their original cost. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to a specific country. Diversification is a method to help manage risk; it does not guarantee a profit or protect against loss in a declining market. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Rates of return vary over time, especially for long-term investments. Past performance is not a guarantee of future results. Actual results will vary.
U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid.
Sources: Morningstar, July 11, 2025; Yahoo Finance, 2026; Reuters, December 31, 2024; London Stock Exchange Group, 2026 (Russell 1000 Index and MSCI World ex USA Index, 12/31/2024–12/31/2025); Federal Reserve, 2025.
Prepared by Broadridge Advisor Solutions. © 2026 Broadridge Financial Services, Inc. Distributed by Samalin Wealth.