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, or DXY, measures the dollar against a basket of major currencies; it fell 9.4% in 2025 before edging up 1.7% year to date in 2026 through August 12. ¹ A weaker dollar raises foreign investment returns after conversion into dollars, while a stronger dollar reduces them. Investors cannot control daily currency moves, but they can control their investment mix, diversification and time horizon.

What drives the value of the U.S. dollar?

Currency values reflect global flows of trade and investment. Investors compare interest rates, economic growth, inflation and financial-market stability across countries, then direct money toward the most attractive combination. “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, more foreign money is flowing into the United States than out.”

Four forces shape the value of the dollar: interest rate differences, global investment demand, trade flows and inflation expectations. Higher U.S. rates can attract foreign money when investors believe the added return compensates them for the risk, especially when U.S. rates exceed rates abroad after adjusting for inflation. Countries that export more than they import can also create steady demand for their currencies, while faster inflation reduces purchasing power and can weaken a currency over time.

Why the dollar weakened in 2025 and firmed in 2026

Two policy shifts pulled the dollar lower in 2025. President Trump announced tariffs that raised inflation expectations, while investors anticipated more Federal Reserve (Fed) interest rate cuts. Together, those developments reduced the relative appeal of U.S. assets early in the year. As inflation and rate expectations steadied, the dollar traded in a narrower range.

Changing expectations, rather than the level of rates alone, helped lift the dollar in 2026. “Fed rate expectations move the dollar because interest rates and bond yields direct global capital flows,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “Expectations shifted from rate cuts toward possible hikes, and that larger change supported the dollar. Markets also expected other major central banks to raise rates, so the dollar’s advantage came from the relative shift in the Fed outlook.”

How a stronger or weaker dollar reaches consumers and companies

A stronger dollar usually reaches U.S. consumers through lower prices for imported goods. A European car priced at €50,000 costs $60,000 when one euro buys $1.20, but $45,000 when one euro buys $0.90, even though the price in euros never changes. The exchange rate, not the sticker price, changes the cost for the U.S. buyer.

The effect varies across households because imported necessities consume different shares of household budgets. A weaker dollar can raise the cost of imported food, fuel and other goods, placing more pressure on households that devote a larger share of income to necessities. A stronger dollar can provide relief through lower import prices, while households with larger investment portfolios may notice more of the effect through the converted value of foreign holdings.

A strong dollar creates a different challenge for large U.S. companies that sell overseas. Converting foreign sales into dollars lowers the reported value of that revenue, and a stronger currency can make U.S. exports more expensive for international buyers. “If the dollar keeps strengthening, it could dampen corporate earnings and weigh on stock market performance in the short term,” says Haworth. “Currency remains one input among many, so investors should consider it alongside earnings, valuations and the broader economy.”

The federal deficit and the dollar’s staying power

The federal deficit presents a long-term challenge, and investors track how markets price that risk. Total gross federal debt reached $39.8 trillion on August 5, 2026, while rising interest costs compete with other federal priorities. ² The 10-year Treasury yield, which represents the market interest rate on government borrowing for a decade, offers one measure of investor demand and confidence, although growth, inflation and Federal Reserve policy also influence it.

The U.S. economy provides a powerful offset by continuing to create companies, income and investable assets. Deep financial markets, demand for Treasury securities and the dollar’s global role help attract foreign capital even as investors debate the fiscal outlook. The International Monetary Fund reported that the dollar represented 57.1% of global foreign exchange reserves in the first quarter of 2026, up from 56.4% in the prior quarter and comprises the largest share of any currency. ³

What a fluctuating dollar means for investors

Currency has its largest direct effect when U.S. investors own assets outside the United States. Domestic companies can still face currency effects through overseas revenue, but international holdings translate gains and losses from local currencies back into dollars. In 2025, the MSCI EAFE Index, a benchmark of developed-market stocks outside the United States and Canada, returned 23.7% in local currencies and 31.2% for U.S. investors after currency conversion as the dollar weakened. ⁴

The effect reverses when the dollar strengthens. A U.S. investor can receive a lower return after conversion even when an overseas investment performs well in its home market. Over longer periods, currency sits alongside earnings growth, valuations, interest rates and economic fundamentals as one part of the total-return calculation.

Currency usually supports the investment story rather than determining it. “Currencies fluctuate less than stocks, and predicting their direction is difficult because so many factors influence relative currency values,” says Haworth. “Equity investors, in particular, should stay largely insensitive to short-term dollar trends when positioning long-term investment assets.” A diversified portfolio can help investors avoid making large allocation changes in response to short-term currency headlines.

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 play a major role, because higher rates draw money into Treasury bonds and other dollar-based investments and lift the currency, while lower rates reduce that support. Inflation, demand for safe investments and a changing trade deficit also shape the dollar’s path over longer periods.

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

The U.S. dollar anchors the global financial system. Countries, companies and banks use it every day to trade goods, borrow money and settle payments across borders, and many key commodities, including oil, are priced in dollars, which sustains steady demand. A large share of global debt is also issued in dollars, especially in emerging markets, so the currency keeps 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 attract foreign investment and support the dollar over time, and stronger exports add to that support by raising demand for U.S. goods and services. Inflation and interest rates weigh on the trend as well, since persistent inflation erodes a currency, while stable prices and competitive rates 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 will last before making large changes, and long-term trade agreements, loans and other financial commitments 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, and 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 import costs for U.S. consumers. It can also reduce the dollar value of foreign revenue for U.S. companies and lower overseas investment returns after conversion into dollars. The effect tends to be larger for globally oriented companies and international funds than for investments focused on the domestic economy.

How does a weak dollar affect American investors?

A weak dollar can increase overseas gains after U.S. investors convert them into dollars. It can also raise import costs and add to inflation pressure if businesses pass those costs to consumers. Investors with little foreign exposure may see less direct currency impact, although multinational companies in U.S. indexes can still respond to exchange-rate changes.