- After a period of sustained strength, shifts in the US fiscal outlook, trade dynamics, inflation expectations, and consumer sentiment suggest a turning point for the USD — one that could have meaningful implications for businesses with global exposure.
- For global companies and funds managing international cash flows and investments, understanding these trends is key to making informed hedging and operational decisions.
From inflation risk to growth risk: Key drivers
1. Fiscal tightening and lower bond yields
One of the biggest contributors to USD strength in recent years was heightened fiscal spending, which raised concerns about U.S. debt sustainability. As government borrowing increased, so did bond yields, attracting capital inflows in search of higher yields and boosting the dollar.
The USD has traded along-side yields in recent years
Source: Bloomberg
However, recent developments suggest a shift. The Department of Government Efficiency (DOGE) is moving forward with fiscal and job cuts, which are pushing bond yields lower. As a result, the USD is losing one of its primary sources of support.
The USD reversal is associated with DOGE equity weakness
Source: Bloomberg. The UBS DOGE Risk basket tracks the performance of US-listed stocks that are potentially at risk of Department of Government Efficiency (DOGE) spending cuts.
2. A more measured trade policy approach
Trade uncertainty has historically been a key driver of currency volatility. Over the past year, expectations of new tariffs fueled concerns about inflation, reducing the likelihood of Federal Reserve rate cuts and keeping the USD elevated.
Now, early-stage negotiations with Canada and Mexico suggest that the current administration may be taking a more strategic approach to tariffs, using them as a policy tool rather than an outright economic weapon. This shift is reducing trade-related pressure on inflation and, in turn, easing USD strength.
3. Cooling U.S. economic data
In addition to policy shifts, economic fundamentals are also weighing on the USD. Key indicators point to slowing growth:
- Employment growth is weakening, signaling a softer labor market.
- Retail sales are declining, raising concerns about consumer demand and sentiment.
- Market expectations for Federal Reserve rate cuts are increasing, which could further weaken the dollar.
What does this mean for global companies and funds?
For companies that fund global operations with USD, a softening USD can impact cash flow, aggravate burn, and erode key business performance metrics. If the USD does not go as far, firms are subject to higher import costs when sourcing materials or goods from overseas, or from funding overseas sales, operations, and R&D hubs.1
Venture and private equity funds making cross-border investments will find that FX rates can move materially during the sign-to-close period, potentially impacting the amount of dollars that must be called from LPs.2
Increased FX volatility requires businesses to reassess hedging strategies to protect against unfavorable currency movements.
Looking ahead: Will USD weakness continue?
While short-term fluctuations are inevitable, structural factors suggest that USD strength may continue to moderate. Purchasing power measures such as the Real Effective Exchange Rate (REER) and the Big Mac Index indicate that the dollar remains overvalued. If economic data continues to soften and yield deterioration persists, the downward trend could gain momentum.
From a longer-term lens, the USD remains structurally overvalued
For finance and treasury teams, this evolving FX landscape highlights the importance of a proactive currency risk management strategy. Monitoring market developments, reassessing hedging policies, and maintaining flexibility in global pricing strategies will be critical in navigating this changing environment.
If you’d like to discuss how your business can manage FX risk in this shifting market, our team is here to help. Reach out to your SVB FX Contact or GroupFXRiskAdvisory@svb.com to explore tailored solutions for your global operations.
