Mounting headwinds threaten U.S. dollar momentum

The U.S. dollar is facing several headwinds, including ongoing tariff risks and tightening monetary policy, says Eric Morin, director, global macro and strategy, multi-asset and currency management at CIBC Asset Management.

“The combo of tariffs and tight monetary policy should reduce economic growth by about one percentage point over the next 12 months,” he said in an Aug. 28 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Morin said U.S. economic concerns are only exacerbated by ballooning national debt that has resulted in fiscal deficits at about 6% or 7% — double or triple that of most developed markets. These factors, he said, will weigh negatively on U.S. treasuries and, ultimately, the greenback.

Another headwind for the U.S. dollar is rising concern over the Fed’s independence. President Trump’s recent threats to dismiss members of the Federal Open Market Committee (FOMC) — the body responsible for setting monetary policy — could undermine investor confidence in U.S. institutions, Morin said.

“The concerns about the independence of the Fed is something that should lower the appetite of U.S. assets, especially U.S. treasuries by foreign investors,” he said.

The biggest concern for markets is that due to persistent inflation or resilient growth, the Fed may be unable to deliver the rate cuts currently priced in, which is four or five rate cuts at 25 basis points over the next 12 months, Morin said. This presents a key risk, suggesting that any significant downside pressure on the U.S. dollar may be delayed.

Conversely, there’s also a risk that the U.S. dollar could face further depreciation as headwinds mount, he said, especially if the Fed is forced to cut rates more aggressively than markets currently anticipate.

“What could be the catalyst of renewed downside pressure on the U.S. dollar is a genuine slowdown of job creation, which is something we expect to take place in the fourth quarter of 2025, and in early 2026,” he said. “That should reinforce what is priced, and should also result in the U.S. dollar weakening resuming.”

As a result of these downward pressures, Canadian and foreign investors should consider hedging, he advised.

“It’s not necessarily moving away from a non-hedged portfolio towards something that is fully hedged,” Morin said. “But we’re talking about perhaps a partial hedge, or dynamic hedging strategies that may offer a risk-reward balance between some sort of a currency risk and currency headwind, and also balance with the fact that U.S. stocks remain attractive from a fundamental standpoint.”

Overall, Morin said the U.S. dollar remains the world’s primary reserve currency, and that’s unlikely to change.

“We have a negative outlook for the U.S. dollar,” he said. “It will be a less attractive global reserve currency, but it will remain by far the dominant currency down the road.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.