Last week, the U.S. dollar hit a four-year low… marking a continuation of weakness that began in 2025.
Measured by the U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, the dollar has fallen roughly 10% over the past year.
Unsurprisingly, the move has reignited familiar warnings: fears of a “dollar collapse,” loss of reserve currency status, and claims that the global financial system is entering a dangerous new phase.
But those fears are incredibly overblown.
A closer look at the data shows the dollar’s downturn is not a systemic failure.
In this article, we’ll break down what’s actually driving the dollar lower, why the most extreme fears miss the point, and how investors should think about this move in practical terms.
What’s actually driving dollar weakness
One of the most immediate drivers has been a shift in expectations around U.S. monetary policy.
After a period of tightening to fight inflation in 2022–2023, the Federal Reserve pivoted in 2025, cutting interest rates and signaling more easing ahead.
Meanwhile, economies outside the U.S.—particularly emerging markets and select European assets—have offered relatively better yields or growth prospects over the last year.
As global investors seek diversification and return, this has translated into real capital flows out of U.S. Treasuries and into foreign instruments.
Interest rate differences are one of the biggest drivers of currency flows. When the U.S. no longer offers the highest real yields, foreign investors allocate capital to other markets, reducing sustained demand for dollars.
It’s also important to note that policy comments can shape market behavior at the margins. When leaders signal they’re comfortable with a weaker dollar, investors are less inclined to fight the trend.
In late January, President Trump said the dollar’s value was “great” even as it continued to fall. That reinforced the idea that currency strength wasn’t a near-term priority, and removed a potential source of support for the dollar.
This didn’t trigger a selloff on its own, but it helps explain why the dollar kept drifting lower rather than snapping back.
Why the dollar won’t collapse
Many fearmongering headlines would have you believe that the dollar’s decline represents an existential threat to the market.
But if we separate emotion from mechanics, the reality is different. To keep the dollar’s weakness in perspective, a few facts matter:
- The dollar’s decline is part of a normal cycle that the market has seen many times before. While a four-year low can sound alarming, it still falls well within historical norms.
- The U.S. dollar is still the dominant global currency. Roughly 90% of foreign exchange transactions involve the dollar, and it remains the largest component of global reserves.
- Reserve currency status doesn’t vanish overnight. Even as markets reassess allocations, there’s no credible alternative that can immediately replace the dollar’s depth, liquidity, and stability.
These realities undercut the most extreme “dollar collapse” narratives. Of course, the dollar isn’t immune from pressure, but its fundamental role in the global financial system remains intact.
A weaker dollar creates new opportunities
Historically, dollar weakness has actually tended to support risk assets. Since 2000, periods when the U.S. Dollar Index has declined by 10% or more have often coincided with outperformance in commodities and non-U.S. equities.
For example, during the dollar’s roughly 15% decline from 2002 to 2007, emerging market equities more than doubled the returns of U.S. stocks, while broad commodity indices posted triple-digit gains.
Similar dynamics played out after the dollar peaked in 2020, when commodities and emerging markets significantly outperformed as the dollar weakened into 2021.
The mechanics are straightforward. Commodities are priced in dollars, so a weaker dollar tends to lift nominal prices.
And emerging markets win as dollar debt burdens ease and global capital moves back into riskier assets.
Multinational companies also benefit because profits earned abroad translate into higher dollar profits at home. (Since many U.S. companies report overseas sales in dollars, a weaker dollar naturally lifts reported revenue and earnings.)
The bottom line: The right way to think about the dollar today
Today’s dollar weakness does not signal a system under stress… It simply signals changing market incentives. Interest rates have come down, opportunities abroad have improved, and capital has adjusted accordingly.
That’s a normal process, even if the headlines make it sound ominous.
The dollar may continue to drift lower from here. That wouldn’t be surprising or unprecedented. What matters is recognizing the difference between a noisy macro adjustment and a genuine structural break.
Historically, investors who treat dollar weakness as a reason to retreat tend to miss where returns actually emerge. Those who understand the shift—and position accordingly—are usually better served.
Editor’s note:
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