3 Factors Dragging Down the U.S. Dollar
The U.S. dollar (USD) is under pressure—but what’s driving the decline? Understanding these dynamics is key for investors looking to prepare for what’s ahead.
This graphic, created in partnership with New York Life Investments, provides visual context to the recent weakness in the USD. It explores three key forces underpinning this trend.
The Descent of the U.S. Dollar
The U.S. dollar often acts as a barometer for the global economy, reflecting everything from domestic growth prospects to international investor sentiment.
Recently, however, the dollar’s trajectory has tilted downward. Since the beginning of the year, the USD has fallen approximately 8%.
| Date | Index |
|---|---|
| 2020-08-03 | 117.82 |
| 2020-09-01 | 115.58 |
| 2020-10-01 | 116.73 |
| 2020-11-02 | 116.24 |
| 2020-12-01 | 112.81 |
| 2021-01-04 | 111.21 |
| 2021-02-01 | 112.43 |
| 2021-03-01 | 112.54 |
| 2021-04-01 | 113.75 |
| 2021-05-03 | 112.02 |
| 2021-06-01 | 110.52 |
| 2021-07-01 | 112.75 |
| 2021-08-02 | 112.68 |
| 2021-09-01 | 112.88 |
| 2021-10-01 | 114.39 |
| 2021-11-01 | 114.22 |
| 2021-12-01 | 115.90 |
| 2022-01-03 | 115.42 |
| 2022-02-01 | 115.38 |
| 2022-03-01 | 115.81 |
| 2022-04-01 | 115.48 |
| 2022-05-02 | 119.88 |
| 2022-06-01 | 118.69 |
| 2022-07-01 | 121.51 |
| 2022-08-01 | 121.42 |
| 2022-09-01 | 124.40 |
| 2022-10-03 | 127.08 |
| 2022-11-01 | 127.40 |
| 2022-12-01 | 122.01 |
| 2023-01-02 | 121.44 |
| 2023-02-01 | 118.64 |
| 2023-03-01 | 120.70 |
| 2023-04-03 | 119.43 |
| 2023-05-01 | 119.58 |
| 2023-06-01 | 120.26 |
| 2023-07-03 | 119.56 |
| 2023-08-01 | 118.92 |
| 2023-09-01 | 121.10 |
| 2023-10-02 | 123.36 |
| 2023-11-01 | 124.08 |
| 2023-12-01 | 120.25 |
| 2024-01-01 | 118.77 |
| 2024-02-01 | 120.68 |
| 2024-03-01 | 121.37 |
| 2024-04-01 | 121.89 |
| 2024-05-01 | 123.38 |
| 2024-06-03 | 122.72 |
| 2024-07-01 | 124.77 |
| 2024-08-01 | 124.16 |
| 2024-09-02 | 122.56 |
| 2024-10-01 | 121.92 |
| 2024-11-01 | 125.04 |
| 2024-12-02 | 127.35 |
| 2025-01-01 | 129.49 |
| 2025-02-03 | 129.28 |
| 2025-03-03 | 127.96 |
| 2025-04-01 | 126.68 |
| 2025-05-01 | 123.48 |
| 2025-06-02 | 121.55 |
| 2025-07-01 | 119.77 |
| 2025-08-01 | 121.61 |
| 2025-09-01 | 120.60 |
Many factors go into determining a currency’s relative strength. Below, we explore three forces at play.
1. GDP Growth Projections Are Soft
U.S. Gross Domestic Product (GDP) growth has been trending downward for decades. Between 2020 and 2024, the economy expanded at an average annual rate of just 2.4%, according to World Bank data.
| Years | GDP Growth (%) |
|---|---|
| 1960s | 4.7 |
| 1970s | 3.2 |
| 1980s | 3.1 |
| 1990s | 3.2 |
| 2000s | 1.9 |
| 2010s | 2.4 |
| 2020s (2020-2024) | 2.4 |
| 2025P | 1.9 |
| 2026P | 2.0 |
Looking ahead, the IMF expects this slowdown to persist, projecting growth to slip to 1.9% in 2025 and remain subdued at 2.0% in 2026. Weaker economic momentum makes U.S. assets—including the dollar—less appealing to global investors.
2. Inflation Expectations: Stable But Elevated
Higher inflation weighs on the USD by chipping away at purchasing power, and expectations are still running high with reshoring and trade tensions.
| Quarter | Year | 1-Year Inflation Expectations (%) |
|---|---|---|
| Q2 | 1978 | 6.7 |
| Q2 | 1979 | 9.8 |
| Q2 | 1980 | 9.7 |
| Q2 | 1981 | 7.3 |
| Q2 | 1982 | 4.5 |
| Q2 | 1983 | 3.3 |
| Q2 | 1984 | 4.1 |
| Q2 | 1985 | 3.3 |
| Q2 | 1986 | 2.7 |
| Q2 | 1987 | 3.3 |
| Q2 | 1988 | 3.4 |
| Q2 | 1989 | 4.3 |
| Q2 | 1990 | 3.6 |
| Q2 | 1991 | 3.2 |
| Q2 | 1992 | 3.0 |
| Q2 | 1993 | 3.1 |
| Q2 | 1994 | 2.9 |
| Q2 | 1995 | 3.0 |
| Q2 | 1996 | 3.0 |
| Q2 | 1997 | 2.9 |
| Q2 | 1998 | 2.6 |
| Q2 | 1999 | 2.7 |
| Q2 | 2000 | 3.0 |
| Q2 | 2001 | 3.1 |
| Q2 | 2002 | 2.7 |
| Q2 | 2003 | 2.2 |
| Q2 | 2004 | 3.2 |
| Q2 | 2005 | 3.2 |
| Q2 | 2006 | 3.4 |
| Q2 | 2007 | 3.3 |
| Q2 | 2008 | 5.0 |
| Q2 | 2009 | 2.9 |
| Q2 | 2010 | 3.0 |
| Q2 | 2011 | 4.2 |
| Q2 | 2012 | 3.1 |
| Q2 | 2013 | 3.1 |
| Q2 | 2014 | 3.2 |
| Q2 | 2015 | 2.7 |
| Q2 | 2016 | 2.6 |
| Q2 | 2017 | 2.5 |
| Q2 | 2018 | 2.8 |
| Q2 | 2019 | 2.7 |
| Q2 | 2020 | 2.8 |
| Q2 | 2021 | 4.1 |
| Q2 | 2022 | 5.3 |
| Q2 | 2023 | 4.0 |
| Q2 | 2024 | 3.2 |
| Q2 | 2025 | 6.0 |
The 3-month average of University of Michigan inflation expectations has climbed to 6.0%, the highest since 1981.
3. Interest Rates Are Down
The Federal Reserve delivered its first rate cut since late 2024 this week, trimming rates by a quarter point and signaling more reductions could follow. The move reflects mounting concerns over slowing economic growth and a weakening job market.
| Date | Effective Fed Funds Rate (%) |
|---|---|
| 2024-06-01 | 5.33 |
| 2024-07-01 | 5.33 |
| 2024-08-01 | 5.33 |
| 2024-09-01 | 5.13 |
| 2024-10-01 | 4.83 |
| 2024-11-01 | 4.64 |
| 2024-12-01 | 4.48 |
| 2025-01-01 | 4.33 |
| 2025-02-01 | 4.33 |
| 2025-03-01 | 4.33 |
| 2025-04-01 | 4.33 |
| 2025-05-01 | 4.33 |
| 2025-06-01 | 4.33 |
| 2025-07-01 | 4.33 |
| 2025-08-01 | 4.33 |
While U.S. yields remain elevated by recent standards, the cut makes dollar-denominated assets less attractive, adding fresh pressure on the currency.
Why the Dollar’s Direction Matters
While the U.S. dollar has recently softened, strategists see risks as roughly balanced. Competing forces—like tariffs and global growth concerns—suggest continued volatility, making it a good time to speak with your financial professional about how your portfolio is positioned.