Money Rehab with Nicole Lapin - Why the Value of the Dollar is Slipping and Why It Matters
Episode Date: April 23, 2025Nicole explains why the value of the dollar is going down and how it will affect your wallet....
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I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand.
It's time for some money rehab.
Well the value of the US dollar has been slipping and this story is up against a bunch of other
doom and gloom headlines, so it could have
gotten lost, but it's really, really important because while it might sound like something
that only economists or bond traders need to worry about, the value of the US dollar
is one of those big macroeconomic forces that trickles right down into our wallets.
And while this is breaking news, you probably already noticed it.
So today I'm going to do a deep dive on what the heck is going on with the dollar,
why it matters, and how it affects you.
And as you've already guessed, it's way more than just currency exchange rates.
The dollar has fallen about 8% this year and is now trading at a three-year low.
This drop is showing up in the dollar index, which is a metric that tracks the dollar against a basket of other major foreign currencies like the euro, the yen, and the British pound.
That's a big move in just a short period of time. So what changed? Well, a lot of recent movement
traces back to tariffs. As we know, President Trump announced sweeping tariffs on imports from
nearly every single major trading partner, and that has
spooked investors in a big way.
But the tariffs were actually supposed to help the US economy. The thinking was these
tariffs would make foreign goods more expensive, which might slow demand for those imports.
While the stock market wasn't into tariffs, slowing demand for those imports could in
theory strengthen the dollar.
But instead, the opposite happened.
The scale of the tariffs and the uncertainty about who would be hit and how hard just created
turbulence. Investors started selling off US assets and then pulling money out of the
country which weakened the demand for the dollar.
So how does a weaker dollar affect us? Well, the side effect that normally gets brought
up first is more expensive international vacation. So, if you're planning a honeymoon in Italy,
if so, I am jealous, even though you will have to pay more for that at-raw spritz. If
you're traveling abroad, the dollar simply won't go as far. But there are other side
effects too. Imported goods get more expensive. Whether it's French wine or Chinese electronics,
prices on foreign goods rise as the dollar loses strength. Even before tariffs kick in, we're already seeing
this at checkout. And then as the dollar weakens, foreign investors might pull their money out
of the US market, which could lead to less demand for stocks and bonds and then more
volatility. So fun. The happy story, though, is that U.S. exports become cheaper abroad. So,
if you're a business owner that sells overseas, that could be good. Foreign buyers get more bang
for their buck, which could boost your sales. But for those of us back home, a weaker dollar
also means mounting inflation pressure. If the dollar keeps weakening and exports stay pricey,
that feeds into inflation. You've probably
heard this described as imported inflation. I want to double click on that last point
because it's easy to confuse a weakening dollar with inflation, but they're not the
exact same thing, even though they do go hand in hand. The value of the dollar is really
contextual. When you think about the value of the dollar, you're talking about how it
stacks up against other currencies in the global market. So think 1 US dollar getting you few euro or yen. Inflation, on the other hand, measures how much
more expensive goods and services are within the US economy itself. When the dollar weakens
internationally, it can also contribute to inflation domestically because imported goods
then become more expensive. But inflation can also
rise for unrelated reasons to the dollar, like supply chain disruptions, or rising wages, or,
I don't know, a pandemic. So net-net, a falling dollar affects what your money is worth abroad,
while inflation affects what your money can buy at home. But to really unpack what would need to
happen in order for the value of the dollar to rise, we need to talk about how the dollar gets valued in the first place.
The US dollar is a fiat currency, which means that it's not backed by gold or any physical
commodity.
Its value comes from the fact that the US government says it has value, and the global
economy agrees.
But the market is what really sets the price.
The dollar's value is driven by supply and demand, just like
anything else in a capitalist economy. There are five big levers that affect the supply
and the demand of the dollar. First, interest rates. When U.S. interest rates are high,
foreign investors want to bring their money back to the United States to get those better
returns. That increases demand for the dollar and it pushes up the dollar's value. When rates are low, though, there is less demand and a weaker dollar.
The second thing is inflation. High inflation makes the dollar less valuable at home and
abroad because it erodes purchasing power.
3. Economic performance A stronger U.S. economy with solid growth and
low unemployment tends to attract foreign capital, which then boosts the dollar.
4. Market Sentiment This one is more psychological, but it's
just as important. If investors think the US economy is headed for trouble, they're
probably going to pull their money out. So less demand for the dollar means lower value.
And 5. Trade Policy and Geopolit. Tariffs, sanctions, other government policies
can spook or attract, depending on what they are, investors.
Uncertainty, though, is a killer for the US dollar.
So you do the math between tariffs,
inflation, interest rates.
It is a perfect storm for the dollar.
But even though the dollar is at a three-year low,
this isn't the first time the dollar has taken a hit. In the early 2000s, after the dot-com bubble burst and the Fed slashed
interest rates, the dollar weakened significantly. And then during the 2008 financial crisis,
the dollar initially dropped as global markets panicked but then recovered as investors flocked
to the safety of U.S. Treasuries. And most recently during the pandemic, the dollar fell
sharply as uncertainty soared,
only to rebound when the U.S. rolled out a juicy stimulus package and vaccines faster
than other countries. What's happening right now, though, is a bit different. The dollar's
weakness is not coming from traditional financial crises, but from policy, volatility, and trade-related
fear. Economists are now seeing higher odds of a
recession due to this trade war and tariff impact. If the economy slows down, the Fed
might cut interest rates to cushion the blow, but that would only further weaken the dollar,
creating this feedback loop of inflation and volatility.
And if the White House meddles with Fed policy, that is another big red flag. I'm going to be talking
about that more tomorrow. But markets depend on trust in U.S. institutions. If investors start
doubting that the Fed can act independently, the dollar could take another nosedive.
As Brad Setzer, a former Treasury official, put it, the world might just be asking whether putting
more money into the U.S. is worth the risk. And when confidence wavers, that's when currencies
take a hit.
For today's tip, you can take straight to the bank. If you're planning a big overseas
purchase like luxury goods or a destination wedding or even importing inventory for your
small business, consider opening a multi-currency account with a fintech bank or a brokerage.
It lets you convert U.S. dollars when the exchange rate is favorable and hold foreign currency until you're ready to spend
it. That way you're not at the mercy of a dollar on the exact day of your transaction.
So a little currency strategy can help you save hundreds or even thousands of dollars
over time. Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money
Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need
some Money Rehab? And let's be honest, we all do. So email us your money questions,
moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me
and follow us on Instagram at MoneyNews
and TikTok at MoneyNewsNetwork for exclusive video content.
And lastly, thank you.
No, seriously, thank you.
Thank you for listening and for investing in yourself,
which is the most important investment you can make.