Why the US Dollar is Crashing

For the past few months, the dollar has been rising high, as markets anticipated that Trump's policies would both cripple other economies and induce more interest rate hikes from the Federal Reserve. However, after a gradual but mild decline throughout February, in the past few days the dollar has suddenly slumped, falling to its lowest point this year. So in this video we're going to take a look at why the dollar has crashed, and what it means for both America and the global economy. Never miss an episode, and always feel in the loop, by subscribing and ringing the bell. To understand this story, you need to know a little bit of context. Once it started looking like Trump might win the election back in late 2024, and then especially once he won the election, the dollar surged against other currencies. Perhaps the best way to illustrate this is to look at the so-called dollar index, which basically measures the strength of the dollar against a weighted basket of currencies. This is generally a better way of gauging the strength of the dollar than just comparing the dollar to a specific currency, like the pound or the euro, because one-on-one comparisons tell you as much about the other currency as they do about the dollar. Anyway, according to the dollar index, the dollar rose steadily from late September, before peaking in early January at a nearly three-year high. This almost understates the strength of the dollar as well. If you exclude the brief surge at the beginning of the pandemic, when investors flooded the strength of the dollar because it was widely considered a safe asset that's good to have during times of uncertainty, the peak we saw in January was the strongest dollar the world has seen since 2002. So why did the prospect of Trump's re-election trigger such a surge in the dollar? Well, there are basically three reasons. Firstly, investors anticipated that Trump's policies of tax cuts and tariffs would mean higher inflation, which would in turn mean higher interest rates from the Federal Reserve, and therefore, it would make it more attractive to save in dollars. Second, there was a widespread sense that Trump's trade wars would hurt other economies more than it would hurt the American economy, which made other countries' currencies less attractive, thereby boosting the dollar, because after all, the dollar's value is determined relative to other currencies. And third, there was a sense in America's business community that Trump's promised agenda of tax cuts and deregulation would boost growth, which came on top of a pre-existing optimism that advances in AI might do the same. However, in the past few weeks or so, the dollar's trajectory has reversed sharply. There was a gradual decline in February, but in the past few days, this decline has accelerated in what you might reasonably call a crash, and as of Thursday morning, the dollar is now at its lowest point since the election in November. Now, this might sound a bit melodramatic, after all, the dollar is still pretty strong by historical standards. But what makes this decline so remarkable is both its speed, this is the sharpest decline we've seen since at least the pandemic, and the fact that it's happening at the same time that Trump is slapping massive tariffs on countries like China, Mexico, and Canada, which for reasons we described earlier, should in theory boost the dollar. So why is this? Well, as with any movement on the financial markets, it's hard to know exactly what's causing it. It might well be that Trump's tariffs have been more focused than investors expected – we haven't seen the universal tariffs that Trump talked up during his campaign, for instance – or because recent advances by Chinese companies like DeepSeek, and even European companies like Mistral, have cast doubt on the assumption that the US will be best placed to capitalise on AI-related gains. But the main reason seems to be that, rather than boosting growth, Trump's policies seem to be pushing the US into a recession. Now we did a whole video on this earlier in the week, so you can go and watch that if you want to know more. But the TLDR is that the uncertainty induced by Trump's constant flip-flopping, especially on tariffs, has dampened consumer and business confidence, to the extent that the US now looks like it might be headed for a recession. In a sense, this shouldn't be all that surprising, once you understand quite how uncertain markets are about Trump's trade policy. The Federal Reserve's Trade Policy Uncertainty Index – which tries to measure exactly this – currently stands 12 standard deviations above its historical norm, and overall economic policy uncertainty is at the highest level ever recorded outside of the pandemic. Not only has this made America less attractive to investors, but it's also made further rate hikes by the Fed less likely. This is because while Trump's tariffs and tax cuts will still be inflationary, the Fed will be less likely to raise rates if the economy is already flirting with recession, because rate hikes slow the economy down yet further. Conversely, there's a renewed sense of optimism about other big economies, especially Europe and China, who have both recently committed to big spending and stimulus programs. In Europe, Germany has just announced that it's going to scrap the debt break to spend hundreds of billions on infrastructure and defence, while the EU announced that it will be borrowing another €150bn at the EU level to fund further defence spending in the wake of Trump's abandoning of Ukraine. While there obviously are questions to be asked about the sustainability of this new debt, this will almost definitely boost growth in the short term. Goldman Sachs, for instance, just upgraded its growth forecast for both Germany and the Eurozone, with an especially steep upgrade for 2026 and 2027. Similarly, in China, the CCP just announced a new stimulus package to keep the economy running in the face of Trump's escalating tariffs, and on Thursday morning Chinese officials signalled that they'd be open to further stimulus if it didn't look like the Chinese economy was on track to meet its ambitious 5% annual growth target. You get the idea. At the same time that markets are becoming more pessimistic about the US, they're becoming more optimistic about big economies like Europe and China, which is accelerating the dollar's decline. As a final thing, while the dollar's weakening is obviously a symptom of some pretty bad things, namely a looming recession in the world's biggest economy, it might have some good consequences. From Trump's perspective, a weak dollar should make American exports more competitive and help reduce the country's ever increasing trade deficit. But from the world's perspective more generally, a weak dollar should come as something of a relief, especially for developing countries. This is both because global commodities like oil, which are often priced in dollars, will become less expensive, but also because it will make it cheaper to borrow your own currency and service any dollar-denominated debts, easing a slow-burning debt crisis that's beset the developing world over the past few years. 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