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Fed Chatter Impacts Dollar

The U.S. dollar has been in demand since the start of the pandemic, as global uncertainty led investors to seek a safe haven for their assets. That trend has started to unwind a bit: in 2025, the dollar declined 5% on a global, trade-weighted basis, and 6% compared to an index of advanced economy currencies. There are several reasons, including economic uncertainty caused by trade policies, the swelling U.S. federal debt, a recovery in the European economy, and simple value investing. Lately, the downward dollar trend has picked up, linked, we think, to pressure President Trump is putting on the Fed to lower interest rates. Events like this raise the risk that the value of U.S. debt will erode over time, referred to as the "debasement trade." In short, investors have started the process of rethinking their commitment to U.S. assets as the cost of doing business in America increases, the balance sheet groans, and risks rise that the central bank may lose a degree of its independence. Still, we would hesitate to say the dollar is at risk of losing its status as the global currency of choice. Despite the pullback, the dollar is still 14% -- more than one standard deviation -- above its 20-year average value, supported by the depth of a $27 trillion market, not to mention by the Federal Reserve and the country's time-tested political/economic system of democratic capitalism. The alternatives -- the euro, yen, yuan, or a combination basket -- have flaws as well. We view the dollar as one of the main checks and balances to the U.S.'s status as the leader of the global economy. We would be concerned the country could be at risk of losing this status if the greenback were to plunge 20% in a short period of time (as it did when S&P downgraded U.S. debt in 2011). A U.S. dollar at 2011 levels would almost certainly mean higher interest rates, a drag on the economy, and intense pressure on major market indices....  downward dollar trend has picked up, linked, we think, to pressure President Trump is putting on the Fed to lower interest rates. Events like this raise the risk that the value of U.S. debt will erode over time, referred to as the "debasement trade." In short, investors have started the process of rethinking their commitment to U.S. assets as the cost of doing business in America increases, the balance sheet groans, and risks rise that the central bank may lose a degree of its independence. Still, we would hesitate to say the dollar is at risk of losing its status as the global currency of choice. Despite the pullback, the dollar is still 14% -- more than one standard deviation -- above its 20-year average value, supported by the depth of a $27 trillion market, not to mention by the Federal Reserve and the country's time-tested political/economic system of democratic capitalism. The alternatives -- the euro, yen, yuan, or a combination basket -- have flaws as well. We view the dollar as one of the main checks and balances to the U.S.'s status as the leader of the global economy. We would be concerned the country could be at risk of losing this status if the greenback were to plunge 20% in a short period of time (as it did when S&P downgraded U.S. debt in 2011). A U.S. dollar at 2011 levels would almost certainly mean higher interest rates, a drag on the economy, and intense pressure on major market indices.  more

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