The US dollar is declining due to economic and geopolitical factors, with concerns about fiscal policies

From Morningstar: 2025-05-22 05:11:00

The US dollar has been declining due to economic and geopolitical factors, with the US Dollar Index down 7.5% in 2025. Concerns about slowing economic growth, higher tariffs, and fiscal policies have contributed to the decline, with Moody’s recently downgrading the US’ credit quality.

Factors like supply/demand dynamics, trade policy, and investor sentiment influence the dollar’s value. New tariffs were expected to strengthen the dollar by reducing the trade deficit, but the ongoing decline began before the tariffs. Analysts predict continued weakening of the dollar in the future.

Moody’s recent downgrade highlighted concerns about the US’ fiscal situation, with unsustainable debt levels and a lack of measures to reduce deficits. While the downgrade may not prompt immediate market reactions, it underscores fiscal risks that could impact interest rates and investor confidence.

Despite recent declines, the dollar is unlikely to lose its status as a global reserve currency due to its critical role in the financial system. Analysts believe a gradual weakening of the dollar is more likely, driven by ongoing factors like tariffs and global economic growth slowing to match the rest of the world.

Strategists recommend revisiting international allocations in portfolios to adjust for a marginally weaker dollar. Overexposure to US assets could hinder potential gains in international markets, especially as the dollar weakens. Ensuring portfolios align with long-term goals and managing currency risks is crucial for investors in the current environment.



Read more at Morningstar: More Than Tariffs: Behind the US Dollar’s Decline