Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

May 12th, 2025

Back on January 10, 2025, it cost $1.024 to buy one Euro.

Last Friday, the $/Euro exchange rate was $1.125 – a drop in the

value of the dollar of about 10%. Similar moves in the value of

the US dollar versus the British pound, Japanese yen, and

Canadian dollar also occurred.

Many analysts have jumped on this drop in the dollar to

attack President Trump’s tariff policies…basically saying that if

we keep heading down this road foreigners will pull back from

investing in the US, the dollar will fall, overseas investments will

outperform, and the US will undermine its global

exceptionalism.

As a quick aside, while panic-stricken, politically-

motivated attacks are nothing new, the fear generated by “end-

of-the-world-as-we-know-it” forecasts since 2008 have reached

a frenzy. Investors would be better served by staying level-

headed.

First of all, think of how many times you have read a

headline that “billionaires are selling all their stocks,” or “the

dollar is dead,” or “a crash, or depression, is coming.” Especially

in the past seventeen years since 2008.

And none of these have happened. So, please stay level-

headed. Yes, the dollar has moved sharply lower in the past four

months or so, but if we look at five- or ten-year timeframes it is

right in the middle of its trading range.

Yes, European stocks have outperformed US stocks this

year, but European stocks are still trailing by a significant

amount over the past decade or more.

So, what explains the movement in the dollar? Here is a

theory that gets too little attention.

Everyone knows that there was a huge surge in the US trade

deficit as importers were front-running tariffs. So, let’s think

about what this means. When people sell goods to the US, they

get dollars. In fact, there is a school of economic thought that

says the world must run trade deficits with the US because the

dollar is the world’s reserve currency and the world needs dollars

to both trade and back their own sovereign currencies with one

of the most trusted assets in the world.

Well, if this is true, and we believe it is, then how many

dollars does the world really need? Between 2010 and 2020, the

trade deficit averaged about $40 billion per month. From 2020

to 2024, the trade deficit averaged about $70 billion per month,

but this was probably at least partly COVID induced…the US

opened up faster than other countries.

Then in December, the trade deficit hit $98 billion, and then

$131 billion in January, $123 billion in February, and $140

billion in March. If we compare this to the $70B per month

average from 2024, in just 4 months of 2025, the US has sent

$212 billion extra dollars overseas. $212 billion!!!!

Assuming that the demand for use of the dollar in

international trade did not change one bit, that $212 billion of

extra dollar supply in foreign hands would certainly knock its

value down on foreign exchange markets. In other words, no

wonder the dollar fell this year. We flooded the world with

dollars by massively increasing our trade deficit.

Well, we believe the front-running comes to an end soon.

Our bet is that this will lead to a stronger dollar as supply and

demand come back into balance. The dollar is not dead or dying.