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Key takeaways
The U.S. dollar is demonstrating renewed strength against most foreign currencies.
The trend reflects the Federal Reserve’s caution in lowering interest rates as well as the potential impact of higher tariffs on foreign exports.
A stronger dollar dampens net returns on overseas investments.
In 2025’s early weeks, the dollar continues enjoying significant strength on global currency markets, consistent with last year’s trend. In early January, the dollar’s value reached just above $1.02 compared to one euro, Europe’s common currency, its highest level in more than two years.1 As recently as late September, the dollar was valued at approximately $1.12 to the euro.
Since late September 2024, the dollar has generally trended higher. Multiple factors may be contributing to the current rally, according to Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Some of it is likely due to the Federal Reserve’s interest rate stance, and some of it can be attributed to expectations of new Trump administration tariff policies.”
Last the year, the European Central Bank initiated interest rate cuts, while the Fed delayed cuts. With markets anticipating the onset of Fed rate cuts in 2024, the dollar weakened against the euro. By September, the Fed began cutting rates. But Haworth notes that the Fed has openly scaled back expectations for rate cuts in 2025, which may mean U.S. interest rates stay elevated for now. “If the Fed remains cautious about further interest rate cuts, that’s likely to put the dollar in a stronger position versus the euro, yen and other major currencies.”
“Relative currency values reflect the global flow of funds. When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.”
Rob Haworth, senior investment strategy director, U.S. Bank Asset Management
With President Donald Trump now in office, markets may also be reacting to speculation about potential tariff impacts on central bank interest rate policy. Trump has proposed tariff hikes on imports coming from major trading partners China, Canada and Mexico. Such tariffs may potentially push prices higher, another factor that could deter further Fed interest rate cuts, again bolstering the dollar.
In 2024, the dollar gained 6.4% in value versus the euro. In the first days of 2025, the dollar remained relatively flat to the euro.1
In mid-2024, the Bank of Japan (BOJ), for the first time in 17 years, raised interest rates. This helped strengthen the yen, but in late 2024, the dollar rallied again. In the chart below, the declining trend from September to November indicates the yen’s increasing value versus the dollar, and the upward slope since shows the dollar regaining strength.1
“Relative currency values reflect the global flow of funds,” says Haworth. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than the other way around.” In 2023, investors perceived that U.S. interest rates were near a peak while still rising in other countries. As a result, more money flowed out of the U.S. This led to a moderate decline in the dollar’s value, but that reversed course in early 2024 as European-based central banks cut interest rates. The nominal broad dollar index, a measure of the dollar’s strength against a basket of global currencies, trended higher, particularly in 2024’s closing months and continuing in early 2025.2
A positive feature of a stronger dollar is the lower cost of imported products from other countries. For example, if a car made in Germany is valued at €50,000 and then is imported to the U.S. when the dollar stands at $1.20 to €1, the retail price of the car in the U.S. would (theoretically) be $60,000 (20% more than its European price to reflect the currency exchange rate). If the dollar strengthened and was valued at $0.90 to €1, the car’s value in the U.S., using the same assumptions, would decline to $45,000, a significant savings for a U.S. consumer.
However, a strong dollar can also detract from revenues generated by multinational companies based in the U.S. The net income earned from foreign sales will decrease once exchanged into dollars. A stronger dollar means U.S. companies that export products abroad will be less competitive because of the product’s elevated price when translated into euros or another currency, which can lead to lower sales as foreign buyers shift to lower cost alternatives. “If the dollar continues to strengthen, it could dampen corporate earnings, which might in turn have an impact on stock market performance, but only in the short term,” says Haworth.
Haworth says the impact of currency movements shouldn’t be a major consideration for investors as they assess the value of specific stocks. The same is not true, however, for U.S. investors who include overseas-based positions in their portfolios.
For example, consider the value of an investment in the MSCI European Union (EU) Index. Year-to-date through January 22, 2025, the index, in local currency terms, generated a return of 11.18%. However, the net return for a U.S.-based investor in the index, translated back into dollars, was just 6.39%, due to the dollar’s relative strength over the period.3 By contrast, when the dollar weakens compared to the euro, it enhances a U.S. investor’s net return after calculating the currency exchange impact.
“Currencies are less volatile than stocks as a whole, and their direction is challenging to predict, given numerous factors that influence relative currency values,” says Haworth. “Equity investors, in particular, should be somewhat insensitive to short-term dollar trends when positioning long-term investment assets.”
While currency considerations may not play a decisive role in your investment strategy, the issue could be worth discussing with your wealth management professional, particularly if your portfolio includes overseas investments.
In 2023, the dollar declined modestly compared to the euro, Europe’s common currency. At the start of 2023, the dollar was at $1.07 to the euro, but fell to $1.1062 by year’s end. By 2024’s close, the dollar recovered, requiring only $1.036 to exchange for one euro. It is notable that in August 2022, the dollar reached parity with the euro ($1 = 1 euro).1 As is always the case, investors can expect currency values will fluctuate over time.
While currency values fluctuate constantly, between 2008 and 2022, the general trend was toward a stronger dollar. As recently as 2008, $1.60 was required to purchase one euro. In August 2022, the dollar reached parity with the euro ($1 = 1 euro). For a brief time, it took less than $1 to purchase one euro. In later 2022, the dollar began giving up some ground, and by the end of 2023, the exchange rate was $1.1062 to the euro. The dollar regained ground in 2024, and at year’s end stood at $1.036 to the euro.1 From a historical perspective, the dollar and euro remain fairly close to parity.
Currency valuations fluctuate constantly, driven by the flow of funds between markets. The two biggest drivers are central bank policies (interest rates set by the U.S. Federal Reserve and its counterparts in Europe, England, Japan and elsewhere); and economic growth relative to inflation. Those factors often dictate which way money flows. If attractive interest rates and economic conditions in the U.S. draw foreign investors, the dollar is more in demand and gains strength. If, by contrast, other countries offer more attractive interest rates and more favorable economic conditions, it will likely be reflected in their own currencies gaining strength and the dollar weakening.
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