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The U.S. dollar is the world’s reserve currency, with the Euro in second place in global central bank reserve holdings.
Although the U.S. Dollar still dominates international trade, the recent decline forces investors to reconsider the Euro as a reserve for trade and reserve holdings.
The gradual shift from the dollar is one of the most important market trends today.
Why the Dollar is Declining
The U.S. Dollar has continued declining, with the dollar index falling 10% in 2025 as of 23 April.
President Trump’s trade tariffs have wiped out gains made by the dollar following his widely anticipated election in November 2025, and the currency and stock markets have been turbulent since.
Analysts and online trading data suggest the decline will continue before markets stabilize.
Here are the key factors behind the dollar’s decline.
Economic and Policy Factors
The U.S. has trade relations with over 200 countries, including China, Mexico, Germany, the United Kingdom, Canada, Japan, and others.
The country’s international trading reached $5.4 trillion in 2024, with imports making up 61.1% of the volume.
In 2025, tariffs will impact trade relations and push the demand for goods, services, and the dollar to new lows.
The U.S. trade tariffs and policy on goods and services create uncertainties in global markets and will weaken the dollar as the cost of importation increases.
Retaliatory tariffs from other countries also contribute to the dollar’s fall, as the cost of exports makes it difficult for businesses to compete.
Tariffs are a significant risk to global economic stability and influence growth forecasts, inflation, interest rates, and other economic indicators.
The IMF’s growth forecast for 2025 indicates lower optimism based on the impact of U.S. tariffs and global economic challenges.
The slowdown in economic growth reduces demand for the dollar as a reserve currency and means that the dollar loses value during periods of global economic downturn.
High Inflation and National Debt Worsen Dollar Decline
The U.S. also struggles with high inflation rates and towering national debt.
The consumer price index (CPI) dropped from 3% to 2.8% in March for the first time in five months, but inflation slightly improved.
Fears of worsened inflation are a key reason the Fed keeps the current interest rates. Market watchers expect three rate cuts in 2025, depending on how the economy shapes up.
The national debt crossed $36.2 trillion in January and is expected to increase as the dollar weakens and interest rates rise.
Higher national debt will pile more pressure on the dollar and can spur investors’ decision to abandon the currency for a more stable euro.
Dedollarization and geopolitical undertones also contribute to the noticeable shift away from the dollar.
China, Russia, and several other countries are leading efforts to shift global trade from the dollar.
The Euro, Ruble, and Yuan are emerging as alternatives for international trade and may surpass the dollar in volume.
Is the Eurozone a Better Option?
Global investment sentiments may be shifting towards the Euro, but there are several considerations, especially the competitiveness of the Eurozone economy.
The European Central Bank (ECB) recently cut interest rates by 25 basis points and is open to more cuts.
The ECB President Christine Lagarde says that the Union is “in the presence of a negative demand shock,” and that the tariffs “net impact on inflation is less than clear at this point in time.”
While the dollar struggles against other significant currencies, investors looking at the Euro may consider stability before returns.
The demand for safe-haven currencies is higher, with traditional currencies like the Swiss franc and the Japanese yen gaining against the greenback.
Potential Impacts on the Economy and Markets
As more investors abandon the dollar for the Euro, opportunities and pitfalls will arise for investors, companies, businesses, and the broader economy, not just in the US and the Eurozone but globally.
Currency Devaluation
The dollar’s decline brings good and bad news to other countries; while some stand to benefit, others may rightly be wary of economic downturns if the dollar keeps falling.
This might force central banks to devalue currencies, especially in emerging economies that rely heavily on the dollar for international trade.
Worsened Capital Flight
Capital flight from the U.S. may worsen as investors pull more funds from dollar assets.
Although the U.S. stocks saw heightened volatility in both directions, a more choppy economy may force investors towards the Euro.
Opportunities for Investors/Traders
Increased market volatility and volume will provide opportunities for traders looking to short or long the EUR/USD and other USD pairs.
As more investors move to the Euro, traders can expect a higher buying pressure for the EUR and Euro-dominated assets while the dollar faces selling pressure.
Key market levels for both assets will provide rallying points for price.
Opportunities for U.S.-based Foreign Companies
Thanks to the U.S.’s weakened state, companies engaged in international trade may find more opportunities to earn more dollars.
However, the tariff war could significantly impact revenue generation and the profitability of such companies.
Can the Dollar Bounce Back?
Although market watchers expect the U.S. dollar index (DXY) to keep falling against other major currencies in 2025, President Trump might just implement his plan to create and protect U.S. jobs, make American products more competitive, and raise revenues to fund investments while reducing the burden on the dollar.
The dollar can recover losses and bounce back.
However, the coming months will be crucial to forming investors’ sentiments.
Before You Go…
Interested in being a smarter investor? Here are a few popular articles to help you learn more so you can confidently grow your wealth.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
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