Well into President Trump’s second term, the trend of U.S. dollar weakening appears to be continuing. All major world currencies have significantly appreciated against the dollar since January 20: at their recent peak, the euro and the Japanese yen strengthened by approximately 10%, the British pound by 9% and the Canadian dollar by over 3%, among others.
What are the key drivers of the dollar’s depreciation?
There are two primary factors behind the dollar’s decline: one domestic and one international.
Domestic Factors:
The Trump administration’s bold negotiation tactics and the likelihood of a prolonged trade war created a climate of uncertainty. This led many companies to delay expansion plans and increased the perceived risk of a recession in the United States. In response to a potential economic slowdown, the Federal Reserve may resume interest rate cuts as early as this summer, especially if labor conditions deteriorate – even if inflation does not fall below the 2% target. Lower economic growth and lower interest rates reduce the appeal of dollar-denominated assets further weakening the currency. Furthermore, according to the Congressional Budget Office, the potential impact of the “One Big Beautiful Bill Act” tax and spending package could substantially widen the federal deficit, potentially adding further downward pressure on the U.S. dollar.
International Factors:
In the long term, the Trump administration’s use of trade policy as a geopolitical tool could prompt a global reassessment of the dollar’s status as the cornerstone of the international financial system. This echoes the reaction from the BRICS countries* after seven Russian banks were removed from the SWIFT payment system, a global messaging network for financial institutions, and Russia had its dollar accounts frozen following the invasion of Ukraine.
While the U.S. holds leverage as the world’s largest importer, it remains heavily dependent on foreign creditors – particularly China – which holds approximately $800 billion in U.S. treasuries. Should China retaliate by selling a portion of these bonds, it could drive up U.S. borrowing costs, slow economic growth and place additional pressure on the dollar. However, such action seems unlikely as it would also carry significant risks for China. Specifically, a large sale of U.S. bonds would increase the value of the Chinese yuan, adding pressure to the country’s exporters who are already struggling due to a global economic slowdown.
A strategic preference for a weaker dollar?
Despite the usual official rhetoric supporting a strong currency, the current administration may favor a weaker dollar. Like tariffs, a depreciated dollar increases the costs of imports and may stimulate domestic production by making exports more competitive.
Given these interconnected domestic and international considerations, it is likely that the dollar will remain vulnerable in the months ahead, despite the recent short-term lift from the 90-day tariff suspension.
What are the implications for U.S. businesses?
There are two implications for U.S businesses: for importers and for exporters.
For Importers:
When U.S. companies pay their invoices from abroad in U.S. dollars (USD), they effectively transfer foreign exchange (FX) control to their suppliers. This can undermine an importer’s pricing power, as a weaker dollar will likely prompt suppliers to raise their prices to protect their margins. Paying international invoices in local currencies removes the need for the supplier to inflate USD prices. By managing foreign currency exposure, U.S. importers can navigate FX fluctuations instead of paying a premium to the supplier to do so.
For Exporters:
For the same reason, pricing in foreign currency protects international customers from foreign exchange risk, making U.S. products more attractive abroad. To mitigate FX risk and safeguard against a weakening dollar, U.S. exporters can hedge future foreign receivables to protect their profit margins.
Summary
With the U.S. dollar facing sustained volatility due to domestic uncertainty and global geopolitical shifts, U.S. businesses must act decisively to protect their cash flows and mitigate the impact of currency volatility on their bottom line by transacting in foreign currencies where appropriate. **
This strategic shift empowers importers to negotiate better terms and avoid built-in premiums, while helping exporters boost competitiveness by shielding clients from FX risk.
Additionally, businesses should adopt active currency hedging strategies to stabilize cash flows and preserve profit margins amid currency volatility.
In short, transacting in local currencies and implementing robust hedging strategies are no longer optional. They have become an essential tool for managing risk and maintaining financial control in a volatile market environment.
About the Author – JC Fernandez-Seoane, director of foreign exchange, WSFS Bank
JC Fernandez-Seoane is WSFS Director of Foreign Exchange. His main goal at WSFS is to design and deliver foreign exchange risk management solutions to the Bank’s Clients. JC has always worked for international banks in the foreign exchange and financial derivatives markets, first in Europe (London, Paris and Madrid), and later in New York City.
JC received a master’s degree in international economics from Sciences-Po in Paris, an Executive MBA from London Business School in the UK, and a master’s degree in Extension Studies from Harvard University.
*The BRICS countries are a group of nations that cooperate on economic, political and development issues and aim to promote a multipolar world. There are currently nine BRICS countries: Brazil, China, Russia, India, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates.
** In some industries, such as energy or commodities, transactions are typically denominated in U.S. dollars, limiting the ability to invoice in local currencies.
