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The Dollar Falters as Confidence in U.S. Policy Wanes

The U.S. dollar has recorded its steepest first-half decline since 1973, falling more than 10 percent against a basket of major trading partner currencies. The downturn comes at a time when the American economy is still growing and equity markets are rebounding—factors that would normally support a strong dollar.

Historically, sharp dollar declines have aligned with structural changes in the financial system. In 1973, the decoupling of the dollar from gold marked a fundamental shift. Today, the shift appears to be geopolitical and policy-driven. Markets are adjusting to the consequences of the Trump administration’s trade and fiscal strategies, including the introduction of aggressive tariffs and an increased appetite for deficit spending.

While some of the administration’s more extreme tariff proposals have since been scaled back, the dollar has continued to slide. Early optimism about pro-business reforms and deregulation has given way to sustained concerns over inflation, rising interest rates, and a long-term erosion of trust in U.S. policy predictability. The result has been weaker demand for dollar-denominated assets, even among traditionally risk-averse investors.

The weaker dollar has several practical consequences. For American consumers and travelers, imported goods and overseas trips have become more expensive. For foreign investors, the reduced value of returns in dollar terms dampens enthusiasm for U.S. markets. Simultaneously, a weaker currency should benefit U.S. exporters—but those gains remain uncertain in the face of ongoing trade disruptions.

Investor behavior reflects the shifting sentiment. Since peaking in January, the dollar index has steadily declined, despite a 24 percent rally in the S&P 500. Measured in euros, the same U.S. equity rally delivers a more modest 15 percent return. Meanwhile, European stocks have become more attractive to American investors when gains are translated back into dollars.

Confidence has also deteriorated in the Treasury market. The U.S. government’s spending plans—expected to add trillions to the deficit—require continued borrowing. At the same time, many global investors have started to reduce their exposure to dollar assets. This combination raises questions about the long-term reliability of both Treasuries and the dollar as safe-haven instruments.

Although full-scale global diversification away from the dollar remains speculative, the early indicators are meaningful. Declining investor demand at a time of increased fiscal strain introduces uncertainty into one of the world’s most stable financial pillars. If that trend continues, the dollar’s role at the center of global finance may face its most serious test in decades.