The US dollar is down nearly 10% this year against a basket of major currencies. This is its largest annual fall since 2017. The fall in the dollar began when President Trump implemented tariffs in April 2025.
How Tariffs Backfired on the Dollar
All else being equal, tariffs should lead to currency appreciation. This is because tariffs reduce imports. Lower imports reduce demand for foreign currency. Assuming there’s no reciprocal action or tariff, exports are not affected. Then, demand for dollars is not affected.
This is exactly what happened during first Trump administration’s tariffs. The dollar rose and offset much of the effect of the tariff. But this time, the opposite happened. The dollar fell when tariffs were announced. And it never quite recovered even though some of those tariffs have been rolled back.
The primary reason is that the US dollar lost some of its safe-haven status. With the volatility of trade policy, US assets are viewed as riskier. At one point, proposals for taxing foreign bond holders interest payments were discussed. Even if this was never likely to be implemented, the thought of it spooked investors.
A New Anchor: The Meteoric Rise of Gold and Silver
And so, gold and silver have come to replace the dollar as the primary safe-haven. Precious metals have been the best performing asset class this year. Gold is up around two thirds, while silver has more than doubled in price. Some of silver’s rise is due to industrial demand. Infrastructure for batteries and electricity generation requires silver, which is why it has outperformed gold.
But gold’s rise is almost entirely safe-haven demand. Gold has performed well despite inflation falling everywhere. Investors now prefer gold to the dollar.
The dollar’s decline in 2025 is no accident. Read between the lines, and it is one of the goals of the Trump administration. The administration wants a weaker dollar to reduce imports, increase exports, and revive manufacturing.
This is easier said than done. In fact, the tariffs have caused manufacturing jobs in the US to decline this year. Many raw materials in the manufacturing process are imported and now face higher costs.
2026 Outlook: Trump’s Fed Appointment and the Dollar’s Fate
What’s the outlook for the dollar in 2026?
This depends on US interest rate policy. The next Fed chair will be appointed this year. President Trump wants lower interest rates. He will likely appoint someone who has a similar view. This doesn’t guarantee that US interest rates will be lowered, but it does increase the likelihood.
If US interest rates continue to fall in 2026, this will put further pressure on the dollar.
For investors, what’s the best approach?
Precious metals will continue to retain their allure and safe-haven status. But there’s a good chance of a correction given how far they have risen this year. Base metals may be a good alternative. Especially if industrial demand due to AI and electrification continue to be strong.
Despite all this, the dollar may recover in 2026. Currency devaluation is a race to the bottom. You can expect other countries to want to keep their currencies weak too, and this itself leading to a dollar recovery.
Disclaimer:
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
Disclosure: The writer invests in precious metals.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.
