One Year In: What a Populist Administration Has Done to the Dollar

A year ago, a new administration took office promising to rewrite America's economic relationship with the rest of the world. Twelve months later, the dollar has lived through a tariff shock, a brief but unnerving sell-off in Treasuries, a credit rating downgrade, a new federal law for stablecoins and an open campaign of pressure on the Federal Reserve. It has not lost its status as the world's reserve currency. But the year offers the clearest case study in modern times of what happens when populist economic policy meets the institutions that underpin the dollar.

April: the tariff shock

The defining moment came on April 2, 2025, when the White House announced sweeping "reciprocal" tariffs on most trading partners, a date it branded Liberation Day. The scale surprised markets. Equities fell sharply over the following days, and something unusual happened: instead of rallying as a safe haven, the dollar weakened and long-term Treasury yields jumped at the same time. For a few days investors were selling US assets together, the pattern more often seen in emerging markets during a crisis of confidence.

The administration paused the steepest tariffs for 90 days within a week, and markets stabilized. Many analysts credited the bond market with forcing the retreat. The episode left a lasting impression on reserve managers and pension funds: the dollar's safe-haven reflex, long taken for granted, could not be assumed when the shock came from Washington itself. Hedging of dollar exposures by foreign investors rose noticeably in the following months, according to several market surveys.

A weaker currency, by accident and design

By the end of June, the dollar index had fallen by roughly a tenth, its weakest first half in about half a century by most measures. Some of that reflected fundamentals, including expectations of Fed rate cuts and improving prospects in Europe after Germany loosened its fiscal rules. Some of it reflected policy uncertainty. And some was welcome in parts of the administration, where officials had long argued that an overvalued dollar hurt American manufacturing.

The weaker dollar did not produce a clean win for exporters, because tariffs raised input costs and invited retaliation or negotiation. Trade deals announced from May onward with partners such as the UK, Japan and the EU set lower tariff rates than those threatened in April, but still far above pre-2025 levels. Effective US tariff rates ended the year at their highest in many decades.

The year showed that the dollar's biggest risk is not a rival currency but doubt about the policy process behind it.

Deficits, a downgrade and the bond market

Fiscal policy added another layer. In May, Moody's cut the US sovereign rating from its top grade, the last of the three major agencies to do so, citing persistent deficits and rising interest costs. In July, Congress passed the large tax and spending package the administration called the One Big Beautiful Bill Act, which extended the 2017 tax cuts. Independent estimates suggested it would add trillions of dollars to deficits over a decade, partly offset in the administration's view by tariff revenue.

The Treasury responded in part by leaning more on short-term bills rather than long bonds, a choice that limited pressure on long-term yields but increased the government's sensitivity to short-term rates. That, in turn, raised the political stakes of Fed policy.

The Fed under pressure

Throughout 2025 the president publicly criticized the Fed chair for not cutting rates faster, and the administration tested the limits of its authority over the central bank, including an attempt to remove a sitting governor that ended up in the courts. The Fed began cutting rates in September, citing a softening labor market, but it insisted its decisions were based on data. With the chair's term due to end in May 2026, the choice of successor has become one of the most closely watched decisions in global finance.

Reserve managers do not need the Fed to lose its independence to change their behavior. It is enough for them to price a higher probability of that outcome. That is one reason central banks kept buying gold at a strong pace, and why gold prices set repeated records during the year.

The unexpected expansion: stablecoins

At the same time, the administration pursued a policy that extends the dollar's reach. The GENIUS Act, signed in July 2025, created the first federal framework for payment stablecoins, requiring issuers to hold high-quality reserves such as cash and short-term Treasuries. Officials openly framed it as a way to spread dollar use abroad and create new demand for government debt. Dollar-pegged tokens already make up the overwhelming majority of the stablecoin market, and their combined supply grew strongly over the year.

This produces a striking contrast. The same government that unsettled foreign holders of Treasuries also built a new digital channel through which households and businesses worldwide can hold dollars outside the US banking system. It is dollar populism with two faces: skeptical of global institutions, enthusiastic about dollar dominance delivered through private tokens.

Scorecard after twelve months

• Status: the dollar remains dominant in reserves, trade invoicing and FX trading, with no challenger close to replacing it.
• Value: noticeably weaker than a year ago against major currencies, partly by policy preference.
• Safe-haven reputation: dented by April's joint sell-off of stocks, bonds and the currency.
• Institutions: the Fed's independence and the tariff process are now open political questions, with major legal challenges pending.
• Reach: extended through a federally regulated stablecoin sector.

The year ahead

Year two brings a new Fed chair, pending court decisions on the legal basis for many tariffs and the November midterm elections, which will determine whether Congress continues to back the administration's agenda. The dollar system has shown resilience, but it has also shown that its foundations are political. For investors and governments alike, the lesson of 2025 is that the currency's future is now being decided as much in campaigns and courtrooms as in trading rooms.

This article is for information only and is not investment advice.