The US Dollar—Strong, Stable, or Weak?

‘The United States does want a strong dollar,’ President Bill Clinton said in 1995.

U.S. $100 notes. Adek Berry/AFP via Getty Images

The U.S. dollar index—a gauge of the dollar against a weighted basket of currencies such as the British pound and Japanese yen—has languished this year.

The index has wiped out its post-election gains, tumbling by about 4 percent in the first three months of 2025.

Concerns surrounding economic growth, inflation, and tariffs have driven the U.S. dollar’s recent slump.

The Federal Reserve’s rate-cutting cycle has further weighed on the dollar.

Market watchers have also attributed the currency’s weakening to foreign developments, such as Germany passing a historic investment package and Japan signaling interest rate hikes.

The sharp decline has sparked questions about the status of the U.S. government’s strong dollar policy.

In the 1990s, then-President Bill Clinton and then-Treasury Secretary Robert Rubin established the policy to attract foreign investment, maintain low inflation levels, and reiterate the U.S. dollar’s role as the world’s reserve currency.

The strategy also delivered a message to the world economy that the U.S. economy remains resilient and that the United States is a safe and stable harbor for international investors.

“The ability of governments that have strong currencies to get a weaker one in the short run may be limited, as we have seen in countless examples over the last several years,” Clinton said in April 1995. “So what you have to do is work over the long run.

“The United States does want a strong dollar.”

Across the globe, governments, central banks, and investors have showcased their confidence in the U.S. dollar through their exposure and holdings.

While the U.S. dollar has ceded ground to other currencies in recent years, dollar hegemony remains intact amid global turmoil.

Data from the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves suggest that the dollar accounts for approximately 60 percent of global reserves, down from close to 75 percent in the early 2000s.

In addition, foreign holdings of U.S. Treasury securities are at an all-time high of more than $8.53 trillion.

To Be Strong or Not to Be Strong

President Donald Trump, pushing an export-driven trade agenda, is at a crossroads.

Administration officials, including Treasury Secretary Scott Bessent, have expressed support for maintaining the strong dollar policy.

“What’s important to remember is the dollar, it’s either weak or strong versus something else,” Bessent said in a recent interview with Bloomberg TV.

“So, we want the dollar to be strong. What we don’t want is other countries to weaken their currencies, to manipulate their trade.”

Appearing before the Economic Club of Chicago in fall 2024, Trump emphasized the importance of keeping the U.S. dollar as the chief international reserve currency.

“If you want to go to Third World status, lose your reserve currency,” he said. “We have to have that. We cannot lose it.”

On multiple occasions, the president has threatened to slap a 100 percent tariff on countries engaged in anti-dollar activities.

Meanwhile, Trump’s challenge is that a strengthening dollar could adversely affect U.S. exporters and potentially limit the United States’ manufacturing prowess.

While a robust dollar can mean cheaper production costs and enhanced global competitiveness, it also makes exports more expensive.

When a foreign currency is weaker than the dollar, U.S. products are less affordable in global markets, reducing demand for goods made in the United States.

Treasury Secretary Steven Mnuchin testifies to Congress in Washington on Dec. 1, 2020. Susan Walsh/AFP via Getty Images

“The classic argument continues: a strong or a weak dollar,“ James Francis, CEO of Paradigm Asset Management, told The Epoch Times. ”Like most things in life, it is all about maintaining equilibrium.”

He said continuing the 30-year strong dollar policy would be a boon for consumers since “it makes [their] next iPhone upgrade a little less expensive or even [their] European vacation stay within ... reach.”

However, a weaker dollar can bolster foreign demand, enhance corporate profits and gross domestic product (GDP), and sustain employment growth.

“Ideally the best scenario is a stable dollar policy that can adapt to the economic cycles,” Francis said, "having the dollar flexible enough to support growth and strong enough to maintain its credibility and purchasing power.”

Former Treasury Secretary Steven Mnuchin has echoed this Goldilocks scenario, arguing that the dollar should be neither too strong nor too weak, but just right.

In an interview with CNBC on March 12, Mnuchin espoused the policy importance of a stable dollar rather than a strong one.

Although he agreed that the financial markets determine exchange rates, Mnuchin said he believes that the United States will continue outperforming Europe and the rest of the world.

Put simply, according to the Wall Street veteran, dollar hegemony will persist.

“I think the dollar is the only safe haven to store assets around the world, and I really don’t see any challenge to the dollar, at least in the next 10 or 20 years as the reserve currency,” Mnuchin said.

According to the International Monetary Fund’s World Economic Outlook in January, the United States is poised to outpace other advanced economies.

For example, the U.S. economy is predicted to expand by 2.7 percent this year. By comparison, the eurozone is on track to grow by 1 percent.

Of course, a lot has happened since that January report, from tariff-fueled market turmoil to adjustments toward growth prospects.

In recent weeks, a term has gained steam on Wall Street: “Europhoria,” referring to positive feelings about Europe’s pooled sovereignty.

Eurozone Revival

The eurozone is witnessing a revival after several years of anemic growth, morose sentiment, and a weakening currency.

Industrial production rebounded by 0.8 percent in January.

Inflation has slowed toward the European Central Bank’s 2 percent target.

The Centre for European Economic Research’s Indicator of Economic Sentiment surged to an eight-month high and surpassed market expectations.

In the financial markets, various European indexes have outperformed Wall Street.

This year, the UK’s FTSE 100 Index has jumped by more than 6 percent.

The German DAX has soared by 16 percent, and the French CAC 40 Index has risen by 10 percent.

STOXX Europe 50 Index, a stock market index that tracks 50 of the largest companies across 17 European countries, has gained 10 percent.

Conversely, the tech-heavy Nasdaq Composite Index and broader S&P 500 have flirted with correction territory (down by 10 percent from their record highs).

The blue-chip Dow Jones Industrial Average is flat year to date.

On the currency side, the euro has advanced by 4.5 percent against the U.S. dollar.

Short-term volatility might persist, but the euro is on track for a solid second half, according to analysts at the National Bank of Canada.

“While some of the recent appreciation is likely overdone considering a still ambiguous growth and geopolitical outlook, we expect the European currency to head towards a stronger footing in the second half of this year,” they wrote in a research note.

Although Europe has experienced near-term gains, the broader economic outlook is still up in the air, according to Fei Chen, CEO and investment strategist at financial services firm Intellectia.

The European Central Bank presents the new 50 euro note at the bank's headquarters in Frankfurt, Germany, on July 5, 2016. Ralph Orlowski/Reuters

“With that, however, more long-term structural headwinds—like inflexibility of labor markets and diminished innovation—are still present,” he told The Epoch Times.

“There is justified optimism, though sustainable recovery will depend on continued reforms and demand abroad.”

Another roadblock could be U.S. tariffs.

The European Central Bank (ECB) projects that 10 percent levies imposed by both the United States and the euro area could trim the bloc’s GDP by as much as 1.2 percent over the year.

Despite the implications of these tariffs, ECB economists said they believe that the risks are “manageable.”

“Overall, while the U.S. shift towards protectionism introduces new economic risks, its impact on the European economy remains manageable if appropriate policy responses are adopted,” ECB economists wrote in a paper earlier this month.

“The ability of European institutions to navigate these challenges—by avoiding unnecessary policy mistakes and leveraging macroeconomic tools effectively—will be the key determinant of economic resilience in the face of rising global trade tensions.”

The European Union delayed implementing its first set of retaliatory tariffs until the middle of April to allow for negotiations.

Ultimately, whether Europe can sustain the current momentum and resolve its underlying issues will be the real test, Francis said.

“Right now, from a market standpoint, I’d say the ‘euphoria’ is more of a cautious optimism rather than an actual revival or comeback,” he said.

What the Future Holds

In the immediate outlook, Royal Bank of Canada economists have stated that the U.S. dollar faces two downside risks: underperforming equities and slowing growth.

“For the next few weeks, we think markets will be dominated by an ongoing pricing out of U.S. exceptionalism as U.S. data slow and hard data likely follow soft data,” they said in a note.

The bank’s economists said various factors, from a recession to reflation, could bolster or weaken dollar prospects over the next 12 months.

National Bank of Canada analysts said they think that the U.S. dollar’s recent depreciation is likely overdone and that haven demand could be resuscitated and offer support for the dollar “at least until Washington clarifies its trade policy” next month.

However, while Trump’s trade policy changes have taken center stage, the Fed’s monetary stance still lingers in the background.

The Fed left interest rates unchanged for the second straight meeting at the March policy meeting.

Investors widely expect the U.S. central bank to keep the benchmark federal funds rate at a range of 4.25 percent to 4.5 percent at the May meeting.

According to the Summary of Economic Projections, monetary policymakers still anticipate two interest rate cuts this year.

That said, Federal Reserve Chairman Jerome Powell and his colleagues have insisted that they are not in a hurry to lower rates, as the economy remains in good shape and monetary policy is well-positioned to respond to a wide array of scenarios.

“For now we see the Fed on hold leaving us with modest U.S. [dollar] weakness on our forecast horizon, mindful that may change,” the Royal Bank of Canada economists stated.

Still, in the years ahead, will King Dollar remain, or will it be dethroned?

This has become a hot topic over the past few years, especially as more emerging markets settle bilateral trade in local currencies and diversify their reserves in other assets.

A chorus of experts has stated that the prospects of replacing the U.S. dollar are unviable, be it the Treasury market’s vast liquidity or the strong demand for dollar-related assets.

Kathy Jones, managing director and chief fixed income strategist at Charles Schwab, said transition to a multicurrency global economy could be possible and offer benefits, but that massive changes would be required.

“It would require some major structural changes in many regions—such as reducing barriers to trade and investment, along with strengthening protections for investors,” Jones wrote in a February report.

“These changes take time and political will.”

And with Trump threatening to wield the tariff weapon, countries’ ebullience about de-dollarization might be paused for the next four years.