From COVID-19 to financial crises, here's how major global events impact the strength of the US dollar

When a currency decreases in value, initially, the impact is felt at home. Imports get more expensive, and inflation ticks up, even as exporters gain an edge. Still, in our interdependent, real-time, global economy—where high-speed algorithmic trading responds instantly to market moves—domestic pressure doesn't stay contained for long.

What might begin as a decline in one currency can trigger selling across multiple markets, especially among economies that share key traits or are heavy trading partners.

Meanwhile, capital flows toward safe-haven currencies like the dollar, creating fresh headaches for U.S. manufacturers and rippling through global markets. This can force trading partners of the original declining currency into their own defensive devaluations, setting off a destabilizing cycle sometimes dubbed a "currency war."

One tumbling domino can trigger a chain reaction of selling across continents, causing a cascade of opportunities—and pitfalls—for investors to navigate. Consider what transpired when panic struck the currency markets in March 2020 when COVID-19 hit. Investors frantically dumped everything they owned and piled into dollars. The British pound plummeted to a 35-year low. Even the Japanese yen, usually a safe bet, barely budged. Meanwhile, there was a mass sell-off in emerging market currencies.

Another major event that rocked currency values was Trump's trade war with China, which started in 2018. When tit-for-tat tariffs send currency markets haywire, China let its yuan sink below 7 to the dollar in 2019. The Department of the Treasury officially labeled China a "currency manipulator" for raising fears of a currency war, although it never fully materialized.

China's yuan then strengthened between 2020 and 2021 as its economy recovered from the COVID-19 pandemic faster than other major economies. Beijing now walks a tightrope between cheap exports and further accusations of and blowback for currency manipulation. However, the overall direction is downward against the dollar as the country strives to maintain global competitiveness.

Meanwhile, other currencies are still riding a rollercoaster. The British pound has tumbled since the Brexit referendum in 2016, going from approximately $1.46 to the dollar before the referendum and never fully recovering, sitting at around $1.22 in early 2025, per Reuters. The euro's story reads like a slow-motion car crash, tumbling from $1.40 to barely holding even with the dollar. And Canada's dollar is a cork on the rising and falling tide of oil prices, floating between $0.70 and $0.80.

The Japanese yen went from 100 to the dollar in 2014 to over 150 today. That's driven by the Bank of Japan, which, despite ending its longstanding period of negative interest rates, is still keeping those at rock bottom relative to the Fed.

On the flip side, Mexico's peso has turned into the surprise champ, muscling up against the dollar despite Latin America's economic headaches. The emerging market currency has been bolstered by interest rates relative to the U.S. and larger economic swings, proving once again just how challenging predicting currency rates can be in an interconnected—and uncertain—world.

For now, America's economic engine appears to keep powering the dollar higher. Europe narrowly averted an outright recession in 2024 but its factories still struggle. China faces multiple headwinds, including fallout from a Ponzi-like real estate bubble, an aging population with fewer workers, and cautious shoppers. Meanwhile, investors continue to flock to American dollars for returns and stability.

After markets believed the Fed would aggressively cut rates, U.S. central bankers announced at a recent meeting that the path forward would be slower, with decision-makers eyeing the strong job market and persistently sticky inflation. Bank of America Merrill Lynch's Managing Director and Global Head of Foreign Exchange Strategy Athanasios Vamvakidis points out that Trump's potential policies on trade, taxes, and immigration would likely push prices higher, at least at first.

"The market has tried to price, in a month, the next four years," Vamvakidis told the Wall Street Journal in December 2024. "The lesson from his first term was that it was not a straight line. In some areas, Trump started aggressive, but there were more pragmatic solutions."

Despite the focus on what Trump may or may not do, the dollar's strength ultimately hinges on what the Fed decides. "The fundamental factor contributing to currency trends is central bank interest rate policy," said Rob Haworth, senior investment strategy director with U.S. Bank Asset Management, in a webinar on what the fluctuating dollar means for investors.

Goldman Sachs economists project the greenback will largely hold its current levels over the year against major currencies. "We will continue to live in a strong U.S. dollar world with a number of risk factors that should support the dollar," said Kamakshya Trivedi, a Goldman Sachs analyst, in a June 2024 interview. "Any erosion in the dollar's strong valuation will likely be gradual."

However, a sudden policy shift, global crisis, or economic upheaval could upend any well-informed prognostication in the current period. In foreign exchange markets, yesterday's sure thing could be today's falling knife—or tomorrow's golden opportunity.

Story editing by Alizah Salario. Copy editing by Paris Close. Photo selection by Ania Antecka.