The U.S. dollar is down, but far from out—yet

The bears have been sniffing around, but the greenback remains the world’s preferred reserve currency despite its recent decline. What’s the outlook for the U.S. dollar now?

 Peter Kenter • Canadian Family Offices.

Published July 29, 2025

Recent headlines shouted that the U.S. Dollar Index, which measures the greenback’s performance against a basket of developed country currencies, fell 10.8 per cent in the first half of 2025—its worst performance since 1973. That is a startling statistic, but it presents more questions than answers about the outlook for the U.S. dollar. For instance: Is the dollar’s drop a bad thing, or the deliberate result of U.S. trade policy? Is the decline accelerating, or will the dollar bounce back? And is this a sign that the greenback is falling from its perch as the world’s preferred reserve currency? 

Unfortunately for global investors, the answers are far from straightforward. Here is a best shot at some of the most commonly asked quandaries about the outlook for the U.S. dollar, based on the opinions of experts:

Is the U.S. dollar’s time as a reserve currency limited?

We need to go back more than 80 years to understand the context on this one. 

The Bretton Woods Agreement of 1944, in which 44 allied nations agreed to create a fixed currency exchange rate using the gold standard, helped cement the U.S. dollar’s reserve status by pegging the currencies of other countries to it and promising to back each dollar with gold at a set rate of US$35 per ounce. (A reserve currency is a foreign currency held by governments and central banks as part of their foreign exchange reserves.) 

In 1971, President Richard Nixon’s decision to abolish the gold standard sent shockwaves through global financial markets. When global leaders met with Treasury Secretary John Connally, they sought assurances that they wouldn’t be stuck holding a currency that the U.S. could simply inflate at will. Connally’s reply: “Well, it’s our dollar, but it’s your problem.” (The incident inspired American economist and Harvard professor Kenneth Rogoff to title his recent book Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead.)

Despite the turbulence of the early 1970s, the dollar has remained the world’s undisputed reserve currency because of a combination of forces: confidence in the country’s economic strength and performance, the need for exchange rate stability, the nation’s influence and stability, and its broad capital markets. When that reputation gets battered, confidence wanes.

Which is what appears to have been happening this year—to a certain extent, at least. But the loss of dominant reserve status for the greenback is likely to be a long and drawn-out process, if it occurs at all.

“The U.S. dollar is poised to be knocked down a couple of pegs,” Rogoff says. “But it will still be first in global finance, because nothing is poised to fully replace it. The dollar just won’t be as unique as it once was.”

Rogoff’s 10-year outlook for the U.S. dollar sees a potential mix of currencies filling the gap as countries such as China become more important to Asian trading partners. 

“For example, the euro will rise to 30 per cent of reserves from the current 20 per cent, the yuan will rise to 15 per cent from the current near-zero, and the U.S. dollar will fall to 40 per cent” from nearly 60 per cent last year, he hypothesizes. “Cryptocurrencies will also play a role in the underground economy.”

Angelo Kourkafas, senior investment strategist with Edward Jones, agrees.

“The dollar remains the world’s reserve currency simply because there’s no alternative,” he says. “About 80 per cent of all daily currency transactions taking place worldwide are still made with the U.S. dollar.”

Kourkafas also throws cold water on the importance of some central banks dumping their dollar reserves.

“Despite these outflows, we have seen very strong inflows from private investors,” he says. “I believe inflows from private investors have actually been greater than the central bank selling that has recently occurred.”

Have recent U.S. policies hastened the dollar’s demise?

Rogoff recently described the dollar as being in “late middle age, but still in good health.” Global tariffs and other policies established during President Donald Trump’s second administration have changed his prognosis.

“Trump II has added a decade to the dollar’s effective age,” he says.

Tom Nakamura, vice-president and portfolio manager, currency strategy and co-head of fixed income, AGF Investments Inc., says he agrees.

“Trump’s second-term policies have eroded investor confidence in the U.S.,” he says.  “More importantly, other countries have responded by focusing on resource development and economic independence, prompting a rotation of investment flows away from the U.S.” 

As the issuer of the world’s reserve currency, the U.S. enjoys the benefit of lower long-term borrowing costs to finance its debt. Foreign countries like to hold U.S. Treasury bonds, which the U.S. government can issue at will due to high confidence in the government to stand behind them. When excessive debt and economic slowdowns reduce confidence in a country’s economy, confidence in its currency may also decline. A policy of unsustainable U.S. government debt may also be fueling the current currency decline.

But any policy-related diminution of the dollar’s reserve status will probably come slowly. Nakamura explains that the recently released Currency Composition of Official Foreign Exchange Reserves (COFER) by the International Monetary Fund suggests that the share of U.S. dollars in currency reserves held steady in Q1 of 2025. 

“The release of Q2 data may be more insightful, but we expect that if there is an adjustment afoot, it will be gradual and span many quarters if not years,” he says. “More tortoise than hare.”

Is the U.S. dollar currently undervalued?

“We have thought the U.S. dollar has been overvalued for more than the last two years and have been increasing our CAD-hedged positions inexpensively during that time,”

says Arthur Salzer, chief executive officer and chief investment officer of Northland Wealth Management. “However, we were uncertain about the conditions that would cause the mean reversion. Given the headline risks of the Trump Administration’s tariff policies combined with the ‘big, beautiful bill,’ policy-driven risks appear to have been sufficient to weaken the greenback recently.”

Kourkafas says the dollar’s near- and long-term performance may also diverge.

“In the near term, the dollar has moved very far, very fast, so it would not be surprising to see a relief rally, and we have started to see that,” he says. “Looking at several long-term valuation metrics, the U.S. dollar is still overvalued relative to other major currencies. The dollar bull market has lasted almost 15 years, but potentially some of the factors that have driven it higher may be starting to reverse. The U.S. economy outperformed the Canadian and other major economies over the last couple of cycles, but the growth gap between the U.S., Canadian and Eurozone economies is starting to narrow for 2025.”

Nakamura says that the weaker position of the U.S. dollar is largely justified.

"It has simply unwound the outsized strength we have seen in recent years,” he says. “While there is likely to be some volatility and short-term profit-taking on U.S. dollar shorts, we expect the dollar to continue to weaken in coming months.”

Is the U.S. deliberately weakening its dollar?

Some economists argue that the Trump administration is pursuing policies designed to weaken the U.S. dollar, making imports more expensive and exports less expensive as part of an effort to rectify perceived trade imbalances. (On the counterargument side, the incoming foreign investment Trump has demanded in his trade “deals” so far, with Japan and the European Union for example, would tend to support the dollar.)

“While the U.S. administration has denied they are pursuing a weak dollar policy, the sum of their initiatives suggests to us that they are at least tolerant of some weakness,” Nakamura says. 

In the 1960s, Belgian-American economist Robert Triffin identified the Triffin Dilemma, which posits that countries issuing the world’s reserve currencies must supply the global economy with enough currency to keep the world’s economic engine ticking. Ending the U.S. gold standard in 1971 allowed the U.S. to do exactly that, by issuing more currency than its gold reserves allowed. However, that eventually results in trade and balance of payments deficits, which in turn can undermine faith in that currency’s reserve status.   

Trump recently fired a volley at the BRICS nations (Brazil, Russia, India, China and South Africa, plus Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates) by threatening them with additional tariffs if they attempted to create a new global reserve currency. That suggested, perhaps, that the U.S. is in no hurry to lose its reserve status and the “big stick” it provides to influence other nations through trade sanctions and other forms of economic warfare.

So, which is the priority? Can the U.S. pull off a hat trick by lowering the value of the dollar and improving its balance of trade, all the while retaining its status as the world reserve currency?

“It’s likely that there will need to be a compromise on at least one of the priorities,” Nakamura says. “A slow decline in the U.S. dollar’s role in the world’s reserves may have some appeal, but the transition needs to be slow and gradual. Any official acceptance of it would be dangerous and reckless for the U.S. administration. A disorderly shift would not only destabilize the dollar and currency markets broadly, but also create issues in the U.S. Treasury bond market and other asset markets.”

While government policy can have a significant effect on currency valuation, Kourkafas says that power is limited.

“Ultimately, it’s the market that’s going to determine the value of the U.S. dollar, instead of what the administration wants to happen,” Kourkafas says. “I would point to economic growth and interest rate differentials as the primary drivers.”

Cryptocurrency to the rescue?

The recent passage of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act establishes a regulatory framework for stablecoins—a kind of cryptocurrency backed 1:1 by U.S. dollars or Treasuries. 

“This ground-breaking technology will buttress the dollar’s status as the global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for U.S. Treasuries, which back stablecoins,” crowed Treasury Secretary Scott Bessent after the act was passed. “The GENIUS Act provides the fast-growing stablecoin market with the regulatory clarity it needs to grow into a multitrillion-dollar industry.” Original Article – "Research, connections key in crypto due diligence process"