Trade and Turbulence: What a Weaker Dollar Means for You

Is anyone else exhausted by the 24/7 financial news cycle?  

With the firehose of information literally streaming at us from any online app we choose, it’s very human to get lost in the deluge and/or respond by shutting down from the onslaught. Tariffs and trade wars are dominating headlines and with good reason.

The duration of trade negotiations and the size of the ultimate tariffs significantly impact businesses, both large and small. Even the current atmosphere of “wait and see” creates costs for businesses. Businesses lack sufficient clarity to make optimal, long-term decisions, such as what goods (or component parts) to import, where to import them from, and whether they can (or will) pass higher costs resulting from tariffs on to their customers.

Adding to an already complex situation is the controversial Big, Beautiful Bill (BBB), which is working its way through Congress. The BBB is drawing the spotlight back to ongoing budget deficits and whether it’s sustainable to continue increasing our national debt. It’s a hot potato question that so far, continues to be handed to future generations to solve.

Navigating Through the Noise

Thinking about the implications of a weaker dollar is one exercise that could easily get lost in the barrage of news and noise.

Since the Great Recession and through the post-pandemic recovery, the U.S. has enjoyed preeminence as the world’s leading economy. For investors, the long-term strength of the dollar has signaled high confidence in the U.S. as a safe-haven for capital (for lowest-risk assets). Further, U.S. companies have attracted significant investment and have earned confidence by delivering growth and earnings (as higher-risk, growth assets).

Historically, our strong dollar has provided purchasing power to import international goods (and component parts for things we assemble) more affordably. For those of us who have been privileged to travel, a strong dollar makes visiting or living overseas easier. My daughter recently spent a college semester in Barcelona and appreciated how much more she could buy and enjoy in Europe. Her “student budget” stretched a little further in Spain, and she loved the entire experience.

However, in recent months, the dollar has been weighed down by dramatic changes and uncertainty from the new administration’s tariff policies, which are protectionist and limit free trade, as well as the undisciplined and chaotic execution of the plan.  The U.S. as the world’s reserve currency has enjoyed decades of dominance.  As the dollar weakens, the question is:  are we witnessing a short-term deviation or are we headed to a new normal with less dominance?

As the U.S. Dollar exhibits weakness, what does it mean for us? 

Just as a strong U.S. dollar has certain advantages, so too does a weakening U.S. dollar. A weaker dollar will make U.S. manufactured goods relatively less expensive, meaning that people in other countries (using their currency) will be more likely to afford goods produced by U.S. manufacturers.  This will help U.S. based global companies that do significant business and/or want to expand their sales overseas. 

The purchase of U.S. bonds by foreign investors helps us to finance our national debt. When the dollar is weaker, foreign investors can purchase U.S. bonds for less of their own currency. If the dollar weakens after the bonds are purchased, the value of the investment in dollar terms could increase.  The primary driver for fixed income investors is the risk/return calculation, so currency fluctuations are a factor behind interest rates (pricing of bonds) and the trust and confidence investors have in the U.S. as a borrower (low risk of default).

Disadvantages of a Weaker U.S. Dollar

There are also disadvantages associated with a weaker dollar. A weaker dollar will make traveling abroad less affordable than it has been (sorry, students and retirees). It could also slow economic growth. How is this related? As the cost of imports into the U.S. increases due to the one-two punch of tariffs and a weaker dollar, inflation could increase which often prompts consumers to buy less as their budgets are stretched. Since the U.S. consumer drives GDP, if the higher costs of tariffs and a weaker dollar leads consumers to slow their spending, this could result in slower economic growth. When this trend is sustained, it could cause the economy to tip into a recession.

As related to the current conversation around the budget deficit and growing national debt, slower (or stalled) economic growth makes it less likely that we will “grow our way out of the debt” which is an argument that sometimes gets kicked around in the media. 

A Mixed Bag of Potential Outcomes

The United States has, in recent years, accounted for approximately 60% of global capital markets. A weaker dollar, coupled with an anticipated slowing economy sparked in large part by higher tariffs, is creating what could become a structural shift, prompting investors to diversify investments away from the U.S. 

It’s possible that, with a sustained weaker dollar, our manufacturing sector will experience a stimulus and renaissance as our exported goods are more affordable abroad. It’s a big “if,” however, since manufacturing plants take years to build and require trained personnel to operate. With a focus on automation and AI to lower costs, improve efficiency and productivity, there is a valid question about how many jobs and the types of jobs a “new manufacturing” economy might create.

A weaker dollar could attract more foreign visitors to the U.S. and serve as an economic stimulus for both the hospitality/tourism sectors and the cities that benefit most from this business. However, U.S. policies must complement and align to encourage international visitors; the experience should be welcoming. With significant changes to policies around who can visit (or study) in the U.S., along with frustrating our allies with a spontaneous trade war, we may quite literally be leaving money on the table and narrowing what could be an economic and business opportunity benefiting communities all around our country.

How should we feel about a weakening U.S. dollar? 

Ultimately, a sustained, weaker dollar could create a “pressure point” for Americans to save more, manage their expenses more effectively, and exercise greater discretion in their consumption. This is an area where most of us can do better.

If our dollar doesn’t go as far (in terms of what we can afford), a longer-term, weaker dollar might become the force that changes our collective behavior culturally and generationally. Being mindful about consumption is a necessary first step to build the capacity to save and invest for our future (and old age).

And, if U.S. families figure out how to manage a budget and save for the future, it would be wonderful to “export” that knowledge to government leaders in support of finding long-term, sustainable solutions for our country’s finances, too.

If you feel like changes are coming fast and furious, and you’re not sure what to pay attention to and what to ignore, you’re not alone. I always welcome a conversation about building a realistic and practical plan to focus your attention and optimize your chances of achieving your goals despite the noise.