In the first half of this year, the U.S. dollar fell by more than 10% against major currencies, recording the largest drop since 1973. Based on the typical exchange rate indicator, the ICE Dollar Index, this is the first time in more than 50 years that the dollar has shown a double-digit decline over a half-year period.
On the 30th of last month (local time), The New York Times (NYT) analyzed that the recent weakness of the dollar is the result of a combination of factors beyond simple exchange rate fluctuations, including President Trump's high tariff policy, the U.S. government's large-scale expenditure plans, and concerns about prolonged inflation.
President Trump announced his intention to impose high tariffs unexpectedly at the beginning of the year, although he withdrew some of them later; however, uncertainty in the foreign exchange market increased. Major participants in the foreign exchange market are selling dollars and diversifying their portfolios into assets in regions such as Europe as trust in the direction of U.S. policy has weakened.
Steve Englander, global head of the G10 foreign exchange institutional sector at Standard Chartered, noted, "How the world perceives U.S. policy is more important than whether the dollar is strong or weak," adding that "expectations for the U.S., which was an exceptional investment, are wobbling."
While a weak dollar may be favorable for U.S. exporters, it increases burdens for Americans traveling abroad and on imported consumption. In fact, due to tariffs imposed on steel, aluminum, and other goods, the U.S. food and clothing industries are complaining about rising costs, and there are concerns that prices for bridal wedding dresses and beverage cans will rise.
This trend is also affecting the asset market. So far this year, the Standard & Poor's 500 Index surged by 24%, but when converted to euros, the gain is only 15%. In contrast, the Stoxx 600 Index in Europe increased by 23% in dollar terms, showing relative superiority. This is the backdrop for some institutional investors, including pension funds, reducing their exposure to U.S. assets and seeking to expand overseas investments.
The weak dollar also puts pressure on the government bond market. The government is pushing for an expansion of fiscal expenditures amounting to trillions of dollars over the next decade, but if the demand for government bonds weakens due to investor outflows, there is a possibility that the cost of procurement will skyrocket.
Rick Reader, chief investment officer (CIO) at BlackRock Global Bond, warned, "The shift away from the dollar won't happen in the short term, but the increase in government liabilities is exacerbating that risk."
Meanwhile, some European central banks, including Switzerland, have lowered their benchmark interest rates to zero in response to falling consumer prices and trade uncertainties. The U.S. and China have agreed to lift some measures that could negatively impact global trade, but experts pointed out that "the confusion of the Trump administration is shaking trust in global financial markets."