The crumbling greenback

Debt, inflation, tariffs weighing on US dollar

As of mid-2025, the U.S. dollar has dropped over 12% against a basket of currencies that matter (see chart of Dollar Index), More striking, the fallout in 2025 represents the sharpest decline in over 50 years.

Economists have posited several reasons for the dollar’s decline. Slowing U.S. growth, stubborn inflation and ever-changing trade policies top the list. And in many ways these factors are interrelated.

President Trump’s erratic trade policies that focused on countries where the U.S. had a trade deficit likely caused the initial decline. That is not surprising because the currency market is the first to feel the initial impact of major policy shifts.

In this case, U.S. companies imported excess supply to front-run tariffs, causing the trade deficit to widen, which by extension, increases demand for foreign currencies. Since currency markets are circular in nature and a zero-sum game (what is good for one country is bad for another), increasing demand for foreign currencies reduces demand for the domestic currency, which leads to currency depreciation. That said, this is likely a short-term phenomenon that will stabilize once the markets have clarity on the end game for tariffs.

When we reach the tariff end game, we will have a better understanding about how this policy shift will impact U.S. inflation and growth which will have a more lasting impact on the trajectory of the U.S. dollar.

The inflation/growth components are most worrisome for the Federal Reserve Board (Fed), which is why the Federal Open Market Committee (FOMC) has been reluctant to cut interest rates. If excess tariffs cause inflation to rise (something we have seen in the last two monthly reports from the U.S. Department of Labor) in an environment where growth is slowing, the result is stagflation. That scenario limits any policy moves the Fed has in its playbook. Raising rates to combat inflation will slow economic activity, while lowering rates to stimulate activity will lead to higher prices. A classic catch-22!

U.S. debt mountain

There is also concern about the mountain of U.S. debt. The tax-and-spend bill that was signed into law on July 4 will add between US$3 trillion and US$8 trillion in new debt depending on which side of the political spectrum the numbers are being calculated. That is on top of the current US$31.5 trillion in debt, which eventually – no matter what additional debt numbers you choose to believe – will make interest payments on the debt the largest single expense in the U.S. Treasury. The U.S. debt and deficits summon up Thelma and Louise’s exit scene over Dead Horse Point.

Concerns about the U.S. debt level is likely why we have seen a surge in gold prices, strengthening foreign currencies, and increased investment in international equity markets. It also draws into question whether the U.S. dollar will continue to be the world’s reserve currency.

Leading this charge are Brazil, Russia, India and China (the BRICs), which have been amassing their gold reserves in the hope they can compete with the U.S. dollar as the world’s reserve currency. This is a longer-term strategy that will not likely displace the U.S. dollar for at least 10 years. But if the fragmented U.S. trade policy continues to act like a leaf blowing in the wind, it could become a serious threat. Should the U.S. dollar lose its reserve status, it will have major implications for U.S. debt levels.

That was likely why Trump threatened Brazil with the imposition of a 50% tariff. Brazil is a country with which the U.S. has a trade surplus. The unhinged position that the tariff threat was related to the former President Jair Bolsonaro’s legal woes is simply a Trump deflection. It also provides Trump with the authority to issue the proclamation by claiming it is in the national interest of the U.S.

Richard Croft is Founder, Chief Investment Officer, and Portfolio Manager of R.N. Croft Financial Group Inc.

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