The weakening of the US dollar has arguably been the story of the year for financial markets.
The mighty greenback is the world’s reserve currency by virtue of the fact that so many nations and investors hold it.
But it has taken a mighty tumble under the Donald Trump 2.0 presidency – to the point this week that the dollar index, which measures it against six other major currencies, is down 9% this year and on course for its worst annual performance since 2017.
It is no coincidence that that decline also took place under a Trump-controlled White House.
The reasons for it are similar but against a far weaker domestic and global economic backdrop than seen last time round.
Why is the dollar falling?
It all forms part of the wider investor turmoil over the president’s trade war, its implications for the US economy and, crucially, the impact of his agenda on the public finances.
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The main cause for concern recently had been the potential for recession in the world’s largest economy due to trade war import duties – tariffs – stoking inflation.
The fallout has damaged the potential for interest rate cuts by the US central bank – a scenario that would normally be supportive of a currency.
But attention has increasingly turned towards the US budget deficit and total debt pile, given Mr Trump’s controversial tax cut and spending hike plans.
Independent figures suggest they will add about $2.4trn to the $36.2trn total for US government debt – a debt pile that has become more expensive to service.
This isn’t good news for Trump’s popularity, surely?
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It’s fair to say weaker stock markets, bond sell-offs and a weaker dollar are not the reactions the president wants to see at the start of his second term.
For all the headline-seeking slogans of “America First” and “Make America Great Again”, the on-off trade war designed to restore US manufacturing might and jobs is taking a toll.
It explains the tax cut push but the president cannot escape the fact that federal, corporate and personal finances – such as investments and pension values – have taken a hit.
Despite that, YouGov poll data this week showed that for the first time in two months, less than half of US adult citizens strongly or somewhat disapproved of how he was handling the job.
What does it all mean for Americans?
If you strip out the short-term hits to pensions and asset values, a weaker dollar will offset some of additional tariff-related costs paid by importers to the US, as a dollar will go further when buying goods in a currency that has strengthened.
In theory, it will help limit the impact of any rising costs paid by consumers once goods have made their way down the supply chain.
Conversely, Americans heading abroad will find their buck doesn’t get them as much.
How about for us Brits?
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We have not been immune from the market turmoil – with pension and fund holdings (especially those containing US interests) taking a knock.
The weaker dollar is bad news for UK-based firms booking dollar earnings back home as they won’t go as far when recorded in pounds.
But a weaker dollar means a pound will go further if you’re travelling to the US.
Sterling is more than 8% up versus the dollar in the year to date and the spot rate currently stands at $1.3566 – around levels last seen in 2022.
Travel money sites suggested that UK tourists heading stateside would get a conversion around the $1.3230 level.
What about the outlook?
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Much will depend on how the Trump trade war plays out in the months ahead.
These values say more about the dollar weakness than pound strength because the UK has many similar challenges to the US – sticky inflation, worries about the sustainability of government debt and weak growth.
The currency shift MAY help to further reduce UK inflationary pressure.
It is hoped, for example, that the weakening dollar will continue to help drive down oil costs.
Brent crude – priced in dollars, crucially, – struck a four-year low in April and a barrel is currently $1 above that level at $64.
