Low Now and In Danger of Weakening Further – Currency Thoughts
A Long, Long View of the Dollar’s External Value: Low Now and In Danger of Weakening Further
September 15, 2025
Charts of the often-quoted DXY/USDX weighted index of the dollar provide a view going back to the birth of flexible dollar rates some 52 and a half years ago. The currency weights reflect trade flows with other major economies at an historic time rather than the current one. The index is dominated by the euro (with a weight of 57.6%), followed by the yen (13.6%), sterling (11.9%), Canadian dollar (9.1%), Swedish krone (4.2%) and Swiss franc (3.6%). A reading of 100 represents the dollar’s value near inception, which makes the calculated percentage rise or fall in the dollar at any future time readily easy.
Over the entire floating rate era, there have been three clear peaks and, alternatively, three major troughs. Measured against the passage of time, both the peaks and troughs trace a downward trend, i.e., lower highs and lower lows. The three peaks were at 160.4 in February 1985, 120.2 in January 2002, and 112.1 in September 2022. The lows occurred at 83.1 in October 1978, 78.9 in August 1992 and 71.8 in March 2008. At the earliest of peaks shortly after the start of former President Reagan’s second term, the dollar was roughly 60% stronger than its weighted value in early 1973, and in October 1978 just before the dollar rescue package launched by former President Carter, the weighted dollar found itself valued 17% weaker than when it first began floating. The second dollar peak happened early in the euro’s life when market participants were still unsure whether a unified European currency would pass the test of time. The width of DXY’s all-time trading range confined by its peak in February 1985 and its March 2008 low is 88.6 index points.
At a high of 110.2 in mid-January of this year, the dollar was not far from its high of 112.1 touched in September 2022. The dollar fell quite sharply in the first six months of President Trump’s second term, attaining a low of 96.4 very early in July. Within the range of dollar movement (88.6 index points) between the March 2008 low and the February 1985 high, the low this past July was just 24.8% above its alltime floor. From a current level of 97.4, the dollar has on net recovered just 1% above the July low and is 11.6% weaker than the 2025 high of 110.2 touched in mid-January.
The Trump administration’s economic policy agenda has many elements that theoretically ought to weigh further on the dollar, not least of which is the high priority attached to reducing the trade deficit very sharply. Past periods when closing the trade imbalance took on great importance are correlated with times of dollar depreciation, reflecting the belief that a cheaper external dollar value would deliver a price competitive lift to exports and import-competing domestic goods.
Higher trade tariffs will boost U.S. inflation. Inflation measures the erosion of the dollar’s internal value. A decline of the dollar will diminish its purchasing power of goods and services denominated in other currencies or, put differently, the dollar’s external value. Over time, one expect the internal and external values to move in tandem.
Steps being taken to lessen the independence of the Fed and acquiring game-changing influence over the central bank’s interest rate decisions and banking regulatory powers will likely hurt investor confidence in dollar-denominated assets. Another negative for the dollar in the future will be the sharp increase in government fiscal deficits and the U.S. federal debt.
Immigration policy promises to depress the growth of available U.S. workers even if other offsetting steps are taken to lift the birth rate sharply. It will be two decades or longer before those future toddlers are ready to take their place in the labor force. With the lessening growth of workers, a sustainably faster rate of productivity growth will be required, but waging war against research universities sends a different message regarding the commitment to that goal and will dissuade talented people from other economies from coming to America..
Widening cracks in America’s rule of law and political stability, as well as frequent flip-flops in policy announcements could impede the willingness of businesses to plan investment projects that are needed to drive productivity growth.
Against dollar headwinds from these and many other radical changes on a wide range of economic and foreign policies, the bet on a greater America in the future seems to rest on the imagined unprecedented benefits of artificial intelligence. However, the United States doesn’t have a monopoly in this burgeoning field, and many of the policy changes seemingly hand over advantages the U.S. once had to its competitors as the AI frontier evolves. Plus, placing one’s hopes on that single egg in the basket, even if it happens to be a golden one, has the trappings of a strategy too narrowly framed whether that be to promote America’s general welfare or to preserve the dollar’s investment appeal as a store of value and its preeminence in international financial and trade transactions. The odds suggest that when one looks at a 1973-2030 chart of the weighted dollar, there will more likely be a penetration beyond one of the three heretofore cited major dollar lows than of the highs.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: U.S. dollar outlook
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