“Our currency is too strong and it’s killing us.”
─ President Donald J. Trump
Upon the election of Donald Trump as President in November 2024, the U.S. dollar soared in value relative to most currencies. Much like U.S. equity investors, currency traders perceived Trump’s America First agenda to be highly constructive for economic growth and for U.S. businesses. In essence, the prevailing theory was that his policies would attract incremental capital from across the world, thus raising demand for the dollar.
However, the dollar has fallen in value through the first half of 2025. The last time that the dollar began a year with such a steep decline was in 1973, when foreign currencies were expressly de-linked from the dollar.1 That move happened two years after President Richard M. Nixon made the stunning decision to decouple the dollar from physical gold. On a trade-weighted basis, the dollar has weakened by more than 10% year-to-date relative to a basket of currencies from the U.S.’s major trading partners. Concurrently, physical gold has increased in value by more than 25% in the first half of 2025, reflecting investor concerns about currency stability.
Given the shocking move in the dollar thus far this year, it seems prudent for us to opine on the potential drivers of this recent dollar weakness.
- Tariff concerns have weakened the dollar.
Classic economic theory would suggest that the dollar should strengthen in response to tariffs to make the financial impact of Trump’s tariffs more palatable. Moreover, the dollar typically strengthens during such times of heightened trade uncertainty because investors may seek refuge in the dollar. Surprising to many, the dollar took a major step down on Liberation Day and the days subsequent to Trump’s tariff announcements.
A number of analysts have sought to explain why the dollar behaved differently compared to what most economists had expected. The most compelling reason may be that faith in the long-term economic potential of the United States, trust in U.S. financial institutions and trade systems, and confidence in the profitability of U.S. products may have fallen in the eyes of those outside our borders.
- Chinks in the dollar’s armor are increasing, thus weakening its reserve currency status.
In the post-World War II era, the U.S. dollar has been the world’s most widely used and held currency, playing a necessary role in global trade and as a store of value for central bank reserves. While the dollar remains the dominant reserve currency across the world, its dominance has undoubtedly started to lessen. This phenomenon is reflected in the dollar’s falling market share of foreign exchange transactions, the declining composition of global foreign exchange reserves, newfound concerns about asset seizures by the U.S. government, and the express commitment of a number of countries to increase trade transactions without using the dollar as an intermediary currency.
Make no mistake – the dollar remains the world’s reserve currency and will likely remain an important reserve asset for the foreseeable future. However, the dollar’s glittering armor has begun to tarnish, which does diminish the attractiveness for foreign countries to hold dollars and dollar-denominated assets.
- The One Big Beautiful Bill (OBBB) appears to add ~$3 trillion in debt to the deficit.
The United States finds itself in the unenviable position of running one of the largest budget deficits in the world. At this point, interest coverage is now a larger expense in the U.S. budget than the Department of Defense expenditures. The consensus estimate is that the OBBB will add an incremental ~$3 trillion to the already large deficit over the next 10 years.[1] This deficit widening will undoubtedly force U.S. Treasury Scott Bessent to issue more Treasuries to finance that deficit at increasingly higher interest rates, which we think will likely result in the Federal Reserve printing dollars to cap those increasing interest rates. Investors may have sold the dollar in anticipation of the passing of the OBBB and the resulting impact on U.S. government debt and the U.S. monetary supply.
- A weaker currency is a desired policy of the Trump Administration.
President Trump’s desire for a weaker dollar is as clear as day, reflected in the quote highlighted at the beginning of this letter. Both Trump and Vice President J.D. Vance have argued for the merits of a weaker currency, saying that dollar strength has been problematic for U.S. industrial competitiveness. Moreover, Stephen Miran, Trump’s Chair of the Council of Economic Advisors, has argued that tariffs and the threat of military retrenchment could force major trading partners to revalue their currencies relative to the dollar. If Trump wants the dollar to weaken, his administration certainly has the fiscal tools and political capital to make that happen.
- U.S. equity valuations are materially higher than those elsewhere in the world.
Using the Cyclically-Adjusted Price/Earnings (CAPE) ratio, which uses the average of 10 years of inflation-adjusted earnings to smooth out business cycle fluctuations, the U.S. stock market looks expensive relative to the rest of the world. According to WorldPERatio.com, the United States currently is one of the world’s most expensive market with a CAPE ratio of 25.2x, only behind that of New Zealand at 31.9x. Many large economies have far more attractive CAPE ratios, like Canada (21.3x), Germany (18.6x), France (18.6x), the United Kingdom (17.7x), Taiwan (16.8x), Japan (15.4x), Singapore (14.3x), Mexico (12.9x), Spain (12.1x), South Korea (11.6x), Brazil (10.9x), and China (10.0x). Relatively cheaper valuations could ultimately cause investors to sell their U.S. holdings to buy more inexpensive assets elsewhere in the world, which would be adding incremental pressure on the dollar.
- U.S. economic exceptionalism seems to be in the rearview mirror.
The outperformance of the U.S. equity markets started in 2007, which was, among other factors, driven by two important phenomena that helped sustain U.S. economic exceptionalism. First, the advent of the smartphone caused U.S. economic growth and earnings growth to dramatically accelerate. Second, the U.S. shale revolution was deflationary in nature, as it lowered energy costs domestically and limited our trade imbalances.
In 2023 and 2024, the strength of the U.S. equity markets was supported in large part by recent advances in artificial intelligence (AI) and expectations for continued economic growth for domestic AI companies. However, as time goes on, it is apparent that any productivity improvements associated with AI will not solely accrue to the United States. AI could, in fact, level the global playing field, ultimately reversing much of the U.S. exceptionalism. Accordingly, with relatively high valuations and an apparent lack of sustainable economic exceptionalism, foreign investors have incrementally less incentive to invest in the United States – particularly so if dollar weakness continues.
- Foreign investors have become increasingly concerned about asset seizures.
The most consequential financial event of the Ukraine War was the seizure of Russian assets by the United States and the European Union. In response, foreign investors started to become anxious about the safety of their U.S. assets. After Trump was elected in November 2024, several events have caused even further heightened anxiety. Stephen Miran announced a proposal to tax foreign holdings of U.S. financial assets. In addition, Trump demanded that Ukraine pay the United States in the form of Ukraine’s rare earth minerals for past and future military aid. Furthermore, Trump threatened Colombian President Gustavo Petro with the seizure of Columbian assets if he did not abide by Trump’s deportation orders.
For many foreign investors, these events likely altered the calculus of owning U.S. assets. From a risk perspective, foreign investors now must contemplate the non-zero possibility of asset seizures. From an investment return perspective, foreigners now also have the threat of higher potential taxes. These actions all lead to weaker demand for U.S. dollars and dollar-denominated assets.
- Concerns about the Federal Reserve cutting rates.
Much of the rest of the world has already begun to ease interest rates in the face of decelerating inflation rates. These actions stand in stark contrast with those of Federal Reserve Chairman Powell, who has kept interest rates high. Once Powell (or his successor) begins to cut rates, a portion of the attractiveness of the dollar should dissipate, as the decline of relatively high U.S. interest rates may send foreign capital elsewhere. With the Federal Reserve widely expected to cut rates two times between now and year-end, the dollar may have weakened preemptively.
- The dollar may just be reversing a portion of exuberant strength.
Over the past 20 years, the dollar has demonstrated particular strength against most major currencies, with a singular exception of the Swiss Franc.2 Thus, it is possible that recent dollar weakness is merely a symbol of currency retrenchment after a long period of grinding upwards.
To be fair, it would be a fool’s errand to point to any one of these theories as the sole contributor to the dollar’s weakness. Chances are that the weakening dollar is the result of the combination of these theories.
Conversely, an important question is what could cause the U.S. dollar to strengthen from here. We believe a number of factors could strengthen the dollar in the short-run:
- Whether Jerome Powell remains the Chairman in the future or not, the Federal Reserve could pursue tighter than expected monetary policy and keep interest rates high.
- A U.S.-centered surge in productivity could surprise and impress, thus continuing the belief in U.S. economic exceptionalism.
- Congress could take steps to reduce the deficit.
- China and/or Europe could face economic duress, which would send investor capital back to the United States.
While the dollar could undergo a period of short-term strength, it seems to us that continued dollar weakness is the most likely scenario over the intermediate period ahead. Accordingly, we have structured client portfolios to benefit from further dollar weakness. We have invested our client capital in U.S. equities with a large portion of their sales made outside the United States, foreign stocks, commodities & commodity companies, cryptocurrencies (where client appropriate), precious metals including gold, silver, & uranium, emerging market companies, and non-U.S. dollar denominated bonds. Alternatively, we have avoided assets that will be hurt by a weaker dollar including U.S. companies with minimal pricing power, long-dated bonds, and junk bonds.
Once again, we express our gratitude to our clients for trusting us with the management of their hard-earned capital. Should you have any questions about the contents of this letter, please reach out to us.
Sincerely,
Pekin Hardy Strauss Wealth Management
This commentary is prepared by Pekin Hardy Strauss, Inc. (dba “Pekin Hardy Strauss Wealth Management”, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any security. The information contained herein is neither investment advice nor a legal opinion. The views expressed are those of the authors as of the date of publicationof this commentary, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy Strauss Inc. cannot assure that the type of investments discussed herein will outperform any other investment strategy in the future. Although information has been obtained from and is based upon sources Pekin Hardy believes to be reliable, we do not guarantee their accuracy. There are no assurances that any predicted results will actually occur. Past performance is no guarantee of future results.
1 Source: https://www.nytimes.com/2025/06/30/business/dollar-decline-trump.html
2 Source: The Congressional Budget Office.