For decades, the U.S. dollar has been the de facto currency for international markets. As investors eye the U.S. market with unease, an economist says that could change, with major impacts in the U.S. and abroad.
Americans hoping to vacation abroad this summer could be in for a rude surprise.
Traveling through parts of Southern Europe used to be a way to get more bang for your buck because of the strong value of the dollar, but things have changed over the last few months. The value of the dollar has plunged about 9% since January, with a 4.5% drop in April alone.
It’s normal for the value of the dollar, like any currency, to rise and fall, says Bilge Erten, an associate professor of economics and international affairs at Northeastern University. But this recent trend is different, she explains, and it’s likely going to have a major impact on Americans’ wallets beyond just travel expenses.
The value of a currency oscillates consistently largely based on confidence in a country’s economic growth, fears around economic factors like inflation and policies implemented by governments and banks. But Erten attributes the current value of the dollar to fallout from the Trump administration’s tariffs, trade wars and tax cuts proposed in the so-called “Big Beautiful Bill” that could increase the federal deficit by trillions of dollars.
“A lot of policies combined to this point where confidence in U.S. policy is getting less and less in terms of whether the government’s actions are really credible in terms of its ability to pay its debt,” Erten says. “It made investors worried that maybe the U.S. is not the safest asset class and that maybe [they] should move [investments] out of the U.S.”
It’s a classic case of supply and demand. All those troubling indicators about the future of the U.S. economy have led investors to sell off bonds, causing the demand for the dollar to go down and pushing its value even lower relative to other currencies.
The fear, Erten explains, is that a weaker U.S. dollar is just one segment in a chain of causes and effects that could lead to economic chaos.
“Everybody is almost certain there’s going to be growing inflation happening, and when that happens, the Fed’s response is usually going to be a little bit of higher interest to reduce that,” Erten says. “Then, the worry about that is that it might reduce economic growth.”
All of these economic factors might seem distant for most people. But Erten emphasizes that Americans will feel the impact of a weakened dollar on their wallets eventually.
“Now what will happen with the U.S. dollar weakening is that all the imported goods prices will go up,” Erten says.
That goes doubly for Americans hoping to travel abroad.
“A weaker U.S. dollar means in order to buy the same goods, you have to give up more dollars abroad, so it’s going to increase travel costs,” Erten says.
On the other hand, international tourists in the U.S. will find their currency goes a little further and comes with more purchasing power.
The impact will extend to most imported goods, home mortgage costs and car payments as well should bond yields continue to increase and the dollar value plummet even further. However, Erten says U.S. exporters might get a boost as American goods become cheaper abroad. As a result, a weakened dollar could potentially narrow the federal deficit, although Erten is uncertain it will have that much of a positive effect.
“In the sectors where the U.S. is already competitive, it’s not very clear whether they really need this competitive boost,” she says.
All of the uncertainty around the dollar runs counter to a global financial market that has long seen U.S. currency as the safest bet around. The dollar is the international reserve asset, and almost every other country holds dollars in their financial portfolio to the point that 59% of all reserve currencies in the world are in U.S. dollars.
There are certain advantages that come with a weaker dollar for countries that are tied to the value of U.S. currency, particularly those with U.S. denominated debts. A weaker dollar means “repaying the debt is going to be a little bit cheaper than what it used to be,” Erten says.
Now, “we are in a little bit of uncertain territory,” Erten says, and governments and investors are looking into ways of becoming less economically reliant on the U.S.
Alternatives like a “multi-polar international reserve system,” a combination of various world currencies taking a power position, potentially divided by region, have been discussed since the early 2000s, Erten says. Meanwhile, China has started to elevate the status of its currency, the renminbi, by creating currency swap deals with countries like Brazil.
These conversations highlight a long-standing issue: a global financial system that is largely reliant on one country’s currency and policy decisions.
“When the Fed makes decisions, those are just decisions for the U.S. economy, but it affects all of the economies because all the rest of the world is linked to the U.S. economy because the U.S. dollar is the dominant currency,” Erten says.
“The world wants to move away from the U.S. dollar,” Erten says, “but there is just not a very good substitute.”