The U.S. dollar’s fluctuating value and what it means for investors

The U.S. dollar has moved enough to influence globally invested portfolios. The U.S. Dollar Index (DXY), which includes the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc, declined 9.4% in 2025. 2026 opened with weakness, touching a four-year low before rebounding into the U.S.-Iran conflict and standing at a 0.4% gain as of April 22. ¹ Those moves helped foreign stocks outperform U.S. stocks in 2025 and early 2026, in part because U.S. investors received a boost when converting foreign gains back into dollars.

A weaker dollar can provide a tailwind when you own investments priced in other currencies, but it can also reverse without warning. It helps to separate what you can control, your investment mix and your time horizon, from what you can’t control: day-to-day currency shifts. This perspective keeps the focus on the factors that can influence markets and portfolios, rather than on headlines that may prove temporary.

What drives the U.S. dollar: Four forces that can push it up – or pull it down

Currency markets move when money flows around the world through trade and finance. Investors constantly compare opportunities across countries. “Relative currency values reflect the global flow of funds,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “When the dollar strengthens, it means more foreign money is flowing into the U.S. than out.” In practice, investors often watch four big forces: interest-rate differences, global investing demand, trade flows, and inflation expectations.

Interest rates can pull money across borders because higher yields may look more attractive when investors believe the risk is similar. Trade flows also shape currency values because countries that sell more goods abroad than they buy typically create steady demand for their currency as buyers pay for those exports. Inflation can work the other way by reducing purchasing power, which can pressure a currency versus peers with lower inflation. When those forces change quickly, as they did in 2025, currencies can react faster than many people expect.

Two developments helped weaken the dollar in 2025, and both tied back to policy expectations. President Trump announced tariffs, which raised inflation expectations, while investors also anticipated more Federal Reserve (Fed) rate cuts, together pushing the dollar sharply lower early in the year. Later, as inflation stabilized and expectations for rate cuts steadied, the dollar traded in a relatively narrow range. “Fed rate cut expectations can move the U.S. dollar because interest rates and bond yields direct global capital flows,” notes Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “Markets are also weighing potential Fed rate cuts later this year against the policy path of other central banks. If the European Central Bank, Bank of Japan, and Bank of England remain relatively firmer, that can limit further dollar appreciation.”

Where currency shows up in real life: Prices, profits, and the economy

When the dollar strengthens, U.S. consumers often feel it first through the price of imported goods. The math is straightforward: a German car priced at €50,000 costs $60,000 when the exchange rate is $1.20 to €1, but the same car costs $45,000 if the dollar strengthens to $0.90 to €1. That kind of shift can make imports feel like a better deal, even when the item’s price in euros never changes. Examples like this help explain why currency can influence everyday purchasing power, not just portfolio statements.

A stronger dollar can also weigh on large U.S. companies that sell abroad because those overseas sales translate into fewer dollars when companies bring revenue home. It can make U.S. exports more expensive for foreign buyers, which can reduce demand and affect sales. “If the dollar continues to strengthen, it could dampen corporate earnings, which could impact stock market performance in the short term,” says Haworth. Markets can digest shifting conditions—but investors do best when they avoid letting short-term moves derail long-term goals.

What it means for investors: Keep currency moves in proper perspective

For U.S. investors, currency tends to have the biggest impact when you own assets outside the United States. Haworth advises investors not to over-focus on currency moves when judging domestic stocks, but he views the currency effect as more meaningful in overseas investments because gains and losses must eventually convert back into dollars. The 2025 results illustrate that point clearly: the MSCI EAFE Index returned 23.7% in local currency, but U.S. investors earned 31.2% after conversion because the dollar weakened notably in the first half of the year. ² The reverse can also happen when the dollar strengthens, because the conversion can reduce what a U.S. investor takes home.

Even so, currency is usually a supporting character, not the whole story, when you invest for the long run. “Currencies fluctuate less than stocks overall, and predicting their direction is difficult because 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.”

How the value of the U.S. dollar is shaped over time

The value of the U.S. dollar changes over time as investors, businesses, and governments respond to shifts in economic conditions and confidence. Interest rates in the United States play a major role because higher rates often attract money into Treasury bonds and other dollar-based investments, which can lift the currency. Lower rates can reduce that support. Inflation, demand for safe investments, and a changing trade deficit can also shape the dollar’s path over longer periods.

The U.S. dollar’s role in the global financial system

The U.S. dollar remains central to the global financial system. Countries, companies, and banks use it every day to trade goods, borrow money, and settle payments across borders. Many key commodities, including oil, are priced in dollars, which helps sustain currency demand. A large share of global debt is also issued in dollars, especially in emerging markets. Because so many financial transactions move through dollar-based systems, the currency continues to hold a leading role in world finance.

Economic factors that influence currency strength over long periods

Long-term currency trends usually reflect the strength and stability of a country’s economy. Steady growth, trusted institutions, and confidence in financial markets can attract foreign investment and support the dollar over time. Trade also plays a role because stronger exports can increase demand for U.S. goods and services. Inflation and interest rates remain important as well. Persistent inflation can weaken a currency, while stable prices and competitive rates can help the dollar hold its value.

Why currency movements tend to unfold gradually

Currencies move every day, but major shifts usually develop slowly. Investors, businesses, and central banks often wait for clearer signs that economic trends are lasting before making large changes. Long-term trade agreements, loans, and other financial commitments also limit sudden swings in demand. The foreign exchange market is the largest and most liquid in the world, so it takes sustained pressure to move major currencies in a lasting way. As a result, big changes in the dollar usually build over time.

The practical takeaway is to stay anchored to a diversified approach and discuss any major overseas exposure with your wealth management professional, especially when headlines tempt quick reactions.

FAQs

What can make the U.S. dollar rise or fall?

The dollar often moves as money flows around the world through trade and investing. Interest‑rate differences, demand for investments across countries, trade flows, and inflation expectations can all push the dollar higher or lower.

How does a strong dollar affect American investors?

A strong dollar can lower the cost of imports, but it can also weigh on U.S. companies that sell overseas by shrinking foreign revenues once they convert back into dollars. It can also reduce what U.S. investors receive from foreign gains after conversion back into dollars.

How does a weak dollar affect American investors?

A weak dollar can boost the dollar value of overseas gains when investors convert them back into dollars. It can also raise the cost of imports, which may add inflation pressure over time.