Keeping an Eye on the Dollar

As the U.S. braces for global reactions to tariffs, investor attention has been predominantly focused on how the stock and bond markets are trading. Not much attention has been centered on the strength of the U.S. Dollar. But, according to Bloomberg, the dollar’s value has dropped in all but a few major currencies by more than 4% this year. (1) This decrease in value is the most significant drop in such a short period since the unfolding of the 2008 Financial Crisis when the dollar slid 4.8%. (2) Traditionally, such a drop would indicate fear of a Recession. The U.S. Dollar Index (DXY) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. It tracks the dollar’s strength against other major global currencies. “Traditionally, the usual bastion of stability and first choice haven for foreign exchange markets,” according to Michael Brown, Sr Research Strategist for Pepperstone, one of the largest global currency brokers. Historically, investors typically flock to the U.S. Dollar when there is global uncertainty, but this time, they are not. While the dollar is entrenched as the world’s primary currency, there is some concern that overseas governments are redirecting to other currencies which could undermine the opinion of strength and the stellar reputation the dollar has always maintained. A weaker dollar will increase the cost of the coming tariffs for U.S. consumers and ease the costs of our tariffs on the rest of the world. This shift in currency strength could significantly impact your purchasing power and the overall cost of living. This area will be another interesting gauge to watch in the days to come as investors brace for tariff and supply chain consequences.