US Dollar Index Crashes But Overvaluation Suggests More Downside
Americans have gotten considerably poorer relative to the rest of the world over the last 6 months.
The US dollar index has dropped by almost 11% in the first half of 2025, which marks the worst decline on the US dollar index since 1973.
And the bad news is that things are about to get much worse.
When the US dollar index weakens, it means the dollar is losing value relative to other currencies like the euro, Canadian dollar, Swiss franc, Japanese yen, and Swedish krona.
Over the last 15 years, Americans have gotten used to seeing their purchasing power rise relative to the rest of the world.
Since 2011, the US dollar index has risen by 36%, representing a massive increase in American wealth relative to the rest of the world.
The dollar has risen by 27% against the euro, by 80% against the Japanese yen, by 67% against the Australian dollar, and the list goes on.
Americans have gotten considerably rich relative to the rest of the world as a result of this dollar appreciation.
But the current administration is on a mission to reverse this trend.
Trump's Dollar Strategy
Dating back to his first term in 2017, Donald Trump has consistently criticized the overvalued dollar.
He has blamed it for America's huge trade deficit and massive manufacturing job losses.
He's not entirely wrong.
A strong dollar disincentivizes foreigners to purchase American-made goods and services, which widens the trade deficit and contributes to job losses in manufacturing.
Donald Trump's goal is to reverse both trends by weakening the US dollar.
And he's probably going to get his way.
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Today, the US interest rate stands at around 4.5%.
The European Central Bank's rate is 2.15%.
So the gap is roughly 2.35%, making the dollar much more attractive to hold.
This spread has been positive since 2015.
The US dollar has consistently provided investors with a higher return than the euro over the last decade.
This high spread is exactly what Donald Trump aims to reverse.
Trump has been putting tremendous pressure on Fed chair Jerome Powell to lower interest rates.
The next Federal Reserve chairman appointed by Trump will almost certainly be biased towards lowering interest rates.
That's potentially setting up the US dollar for a massive decline.
The Overvaluation Signal
The US dollar is still at one of its strongest levels when looking at the real effective exchange rate.
This index from the Bank of International Settlements adjusts the exchange rate for inflation.
The index tells us how overvalued or undervalued the US dollar is relative to other currencies.
At the beginning of this year, the real effective exchange rate for the US dollar was 112 - a level only seen in 1985 and 1970.
We've had a small decline since then, but it remains at the top of its historical range.
This leaves potentially plenty of room for the US dollar to decline.
Just coming back to historical averages of around 90 would mean an additional 15% decline from current levels.
And there’s a possibility that it could even come to the lower end of its historical range.
One thing that could cause this massive drop is the US government's spending.
Donald Trump's "One Big Beautiful Bill" that just passed could act as a catalyst.
Although he made cuts in areas like Medicaid and renewable energy, this has been more than offset by tax cuts.
This amounts to a massive $4.5 trillion in deficit spending over the next 10 years.
We think this deficit spending is actually part of his plan to weaken the US dollar.
Looking at the US government's budget deficit going back to the 1990s, there are 3 periods where the government briefly reduced its deficit: the 1990s, early 2010s, and briefly in 2021.
In all 3 instances where the government reduced spending, the US dollar rose substantially.
But when the government widens its deficit, it generally causes the US dollar to decline.
The big beautiful bill will widen the deficit, likely putting downward pressure on the dollar.
So we think there's plenty of room for the US dollar to weaken over Donald Trump's term, and this is something we're actively betting on with our members at Bravos Research.
We think this will provide a tailwind to asset prices.
US stocks and real estate could benefit.
But the real opportunities of a weak dollar are in:
Foreign stock markets that thrive when the US dollar weakens
Assets like gold and Bitcoin that are inversely correlated to the US dollar
At Bravos Research, we are actively positioned for this shift.
We've ramped up our exposure to Bitcoin and mining stocks that we think can outperform.
We're also actively looking for opportunities in foreign stock markets, particularly India and Argentina.
We've successfully navigated these markets this year with an average gain of 19.2% and an average loss of only 5.66%.
We recently booked a 13.95% profit on $ZIJMF and 13.45% on $IBM.
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