6 minute read
Key Takeaways
- A weaker U.S. dollar reduces global purchasing power and raises import costs.
- It often boosts exports and commodities but can increase inflation at home.
- Investment impacts vary - multinationals and commodity producers may benefit.
- Advisors should reframe client concerns, highlight opportunities, and adjust portfolios accordingly.
- Currency moves are cyclical, and often not catastrophic - thus communication is key.
The U.S. dollar has had a tough year.
After a steep drop in the U.S. Dollar Index ($DXY) - which tracks the dollar against a basket of major foreign currencies - investors and clients alike are feeling the effects.
- The $DXY has declined roughly 11% from its 2025 peak (mid-January) to now - a substantial decline in such a short time.
Figure 1: Barchart, April 2025
Thus, clearly investors have grown pessimistic – with headlines buzzing about a “new era of dollar weakness.”
But what does that actually mean? And more importantly, what should financial advisors be telling their clients?
Let’s break it down.
What Does a Weaker Dollar Mean?
Currencies are relative - when one weakens, others strengthen. So, if the dollar is dropping, other currencies (and their local assets) are rising in value.
Put simply - a weaker dollar means it doesn’t buy as much abroad as it once did.
- Last year, $1 might’ve bought €1.
- Today, that same dollar might only buy €0.90.
That means converting your dollars to euros will now cost you 10% more.
But riddle me this: is the euro stronger - or is the dollar just weaker? Either way, the effect is the same - your dollar buys less.
And that loss of buying power shows up everywhere - from overseas vacations to imported goods.
Why Does the Dollar Weaken?
There could be any number of reasons the dollar could weaken.
But some of the big reasons I’ve spotted seem to be:
- Trump vs. Fed - Trump's public threats to remove Fed Chair Jerome Powell are undermining confidence in the Fed’s independence (and the Fed controls the U.S. money supply through interest rates – thus ding the Fed, ding the dollar).
- Tariff Tensions - Trump's new round of aggressive tariffs on China, the EU, and Vietnam is fueling fears of a global trade war, weakening investor sentiment toward the dollar (and may be forcing nations to sell U.S. assets).
- Debt Concerns - A proposed $4.5 trillion tax cut could significantly widen the U.S. federal deficit, raising alarms over the government’s debt sustainability and pressuring the dollar lower.
Figure 2: Bloomberg, April 2025
In short, think of currency as a product in a market. If fewer people want it, or if there's too much available, its price goes down.
How Does a Weak Dollar Affect Inflation?
When the U.S. dollar weakens, it makes imported goods more expensive. That means everything from electronics and clothing to cars and industrial materials can cost more. This increase in prices contributes to inflation by reducing your buying power at home.
- It’s like walking into the grocery store and finding smaller packages—but paying the same price. You’re effectively getting less for more.
This is especially important for the U.S. economy, which is heavily dependent on imports. In 2024:
- Imports of goods and services made up nearly 14% of GDP
- The trade deficit (meaning imports > exports) reached a staggering $918.4 billion - a 17% increase from the year before.
Put simply, the dollar weakens = imports cost more = businesses face higher input costs = consumers pay more at checkout.
What a Weak Dollar Means for Investments
A weaker U.S. dollar doesn’t just affect consumers and businesses—it also has ripple effects across different asset classes. Here’s how:
- Stocks - When the dollar weakens, U.S. goods become cheaper for buyers abroad. This benefits American companies that export products or earn revenue overseas, as their goods effectively go "on sale" globally. As demand rises, so can earnings, which may boost stock prices - especially for multinational companies and exporters.
- Bonds: Foreign investors earn dollars from U.S. bonds. If the dollar drops, those payments are worth less when converted. So they may back off. To keep interest, bond yields might rise - which helps savers but hurts current bondholders.
- Commodities and Real Estate: Since commodities like oil and gold are priced in dollars, a weaker dollar often leads to higher prices, which could lift commodity producers. The same goes for U.S. real estate - foreign investors see American property as more affordable, boosting demand and potentially lifting property values, especially in major markets (which is good for home sellers, but hurts domestic homebuyers further).
Economic Impact of a Weak Dollar: The Good and Bad
Remember, in economics, there are always two sides – both winners and losers:
Here are some of the pros and cons of a weaker dollar.
Pros:
- Boosts Exports: U.S. goods become cheaper abroad, helping manufacturers and farmers sell more.
- Encourages Tourism: Travel to the U.S. becomes more affordable for foreign visitors.
- Narrows the Trade Deficit: Costlier imports and stronger exports can help balance trade (aka export more and import less).
Cons:
- Drives Up Inflation: A weaker dollar makes imported goods more expensive, which raises prices on everyday items. This added cost pressure can push overall inflation higher - making it harder for the Fed to lower interest rates.
- Squeezes Business Margins: Companies that rely on foreign materials like commodities face rising input costs.
- Reduces Consumer Power: Americans get less value abroad when converting their money (they may have to rethink their Euro-trip).
Talking to Clients: Psychology Matters
Clients often associate “weakness” with loss. And as we’ve detailed to you before, investors absolutely hate losing (they feel it roughly 2.5x more than equivalent gains).
Thus, news of a weakening dollar can trigger fear, even when the fundamentals offer potential opportunity.
That’s why it’s critical to reframe the conversation. Currency fluctuations are cyclical, not catastrophic.
Use this as a chance to:
- Review both domestic and international exposure.
- Reassess inflation and household budgeting.
- Highlight opportunities in commodities and export-focused companies.
Conclusion: The Balanced View
A weaker dollar isn't always bad or good - it just is.
All it does is change economic and investment approaches, rebalancing from imports to exports; from domestic to international.
Now, will the dollar keep declining? That’s anyone's guess because there are cases for and against it.
- We’ve argued for both sides before in What Is a Dollar Shortage? Why It’s a Growing Threat to the World Economy (strong dollar case), and The Coming Global Monetary Reset: What History Tells Us and What Might Be Next (weak dollar case).
However, financial advisors who clearly explain these changes - and proactively adjust portfolios - can turn client concern into confidence.
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.