The dollar could have further to fall as its decline creates a ‘double-edged sword’ for America

The dollar is in a bear market, market watchers said on Wednesday, as one warned the weaker greenback is a “double-edged sword” for the U.S. economy.  

Tuesday saw the dollar suffer its worst one-day slide since April — when Trump’s so-called “liberation day” announcements sparked what became known as the sell America trade. The decline came after the president told reporters in Iowa he believes the dollar is “doing great.”

The U.S. dollar index, which measures the greenback against a basket of major rivals, has shed 2.2% so far this year, after falling more than 9% in 2025.

Trump has long touted the benefits of a devalued U.S. dollar in relation to international trade, and openly lambasted countries that intervene in foreign exchange markets to lower the value of their own currencies against the greenback.

“It doesn’t sound good, but you make a hell of a lot more money with a weaker dollar… than you do with a strong dollar,” he said in July, adding that the ideal scenario is not an extremely weak dollar, but a moderately weaker one. A strong dollar dampens tourism and means U.S. suppliers “can’t sell anything,” he said.

A weak dollar can provide a boost to the domestic economy — for example, by making U.S. goods more attractive to overseas buyers and boosting exports, or bolstering the value of American firms’ foreign earnings when they are converted back to USD.

Despite Trump’s insistence that the decline of the dollar is “great” news for the U.S., there are also negatives attached to a weaker currency — like pricier imports, or a loss of confidence from investors.

Speaking to CNBC’s “Squawk Box Europe” on Wednesday, Nela Richardson, ADP’s chief economist, dubbed the decline of the dollar a “double-edged sword.”

“[It] does make U.S. exports more competitive abroad, but a weak dollar at home doesn’t always have the confidence of markets,” she said. “And that confidence is going to be very important as we look at other things that are a struggle for the U.S. economy, like sticky inflation, like high deficits and debts, and the need to sell treasuries, both domestically and abroad.”

Richardson argued that the decline of the dollar meant the “puzzle of the U.S. economy” had become increasingly complex.

“The headline numbers don’t tell the whole story, and that dollar weakness is a sign of the fraying of that story even though the headline numbers objectively are strong,” she said, referring to data points like the unemployment rate and economic growth.

“If you knew nothing about the last year, but just saw the headline numbers … you would capture a very strong U.S. economy that would suggest a stronger dollar and an interest rate policy that was not going lower, but that is not where we find ourselves today,” she said.

Asked whether consumer confidence — which fell to its lowest in more than a decade this month — played into this picture, Richardson said the reason markets were concerned about the figure when other areas of the economy appeared strong was “a letter: it’s ‘K.'”

“It’s a K-shaped consumer spending pattern where the top 20% of income earners are driving most of the spending in the United States, and the lower quartile of consumers are struggling over the higher pace of inflation,” she told CNBC. “The numbers look good, but underneath the surface is where all the action is.”

This was also evident in the labor market, Richardson added.

“[It’s] reflecting that K-shaped consumer where we’re seeing hiring in health care services, which are expensive services in the United States for most consumers, and leisure and hospitality, which is a discretionary service for all consumers,” she explained. “So, if you are well heeled, this economy is great for you. If you are not, it’s a struggle.”

Cole Smead, CEO and portfolio manager at Smead Capital Management, told CNBC’s “Squawk Box Europe” on Wednesday that he expects the dollar sell-off has further to run.

“We’re in a dollar bear market longer term,” he said. “I say that because if you go back and look at these ‘American manias’ [in markets], if you go back and look at the telecom bubble and tech bubble the late 1990s, the dollar peaked in 2002 and within six years, you saw the dollar go to a low it hadn’t seen for [a] very, very long time.”

From its 2002 peak to its 2008 low, the U.S. dollar index nosedived by around 41%.

“That only took six years,” Smead said. “I point that out because that was ’02 to ’08 and the U.S. stock market peaked in 2000 so, ending these manias, it’s a capital flow problem.”

A huge amount of capital has flowed into the U.S. over the past decade, with the AI boom luring fresh bouts of capital into American markets. Smead noted that 70% of the MSCI World Index is currently comprised of U.S. stocks.

“And so as money will flow eventually [to] other places, as [investors] seek out better returns, we’re going to see the dollar struggle because of that capital account movement abroad,” Smead added.

In a note on Wednesday, TS Lombard’s Daniel Von Ahlen agreed that the dollar was poised to move lower, despite its recent sell-off coming as a surprise.

“Strong global risk sentiment, surging commodity prices, rising odds for Rick Rieder as the next Fed chair and Trump’s recent row with Europe over Greenland all torpedo what was otherwise looking to be a resilient Q1 for the greenback,” he said. “The ‘sell America’ trade is back.”

He added that revised U.S. GDP forecasts, coupled with “Trump’s repeated TACOing,” had supported dollar resilience in the latter half of 2025.

“Strong growth in the U.S. this year is now consensus. Ordinarily, there should be more scope for other [developed markets] growth forecasts to catch up, which reinforces the dollar bear case,” Von Ahlen said. “At the same time, the dollar is still trading at a rich premium on most valuation metrics, leaving it vulnerable to further declines.”