In 2025, as the U.S. presidential election concludes, the Trump administration’s “Tariff 2.0” policy is wreaking havoc on global markets. From comprehensive tariff barriers against China and Canada to Mexico, the global supply chain and monetary system are experiencing severe shocks. At the center of this storm, the U.S. Dollar Index (DXY) has surged past the 107 mark, hitting a nearly two-year high. This is not just a direct reflection of market risk aversion but also a profound indicator of the current complex and volatile international political and economic landscape. It underscores the strong dollar investment strategies and risks we must grasp. This article will provide an in-depth analysis of the underlying logic behind the Dollar Index’s trend in this tariff-triggered shift and how you, as a savvy investor, can navigate the potential crises and opportunities.
Before diving into the impact of tariffs, we must first understand this core indicator that affects the entire global market—the U.S. Dollar Index (DXY). Many market newcomers only know that its rise means the dollar is getting stronger, but its real significance is far more than that.
Simply put, the Dollar Index is a comprehensive indicator that measures the change in the exchange rate of the U.S. dollar against a basket of major currencies. It’s like a ‘comprehensive stock index’ for the dollar, allowing us to see its overall strength or weakness in the international foreign exchange market at a glance. Its calculation is based on a starting value of 100 in March 1973. If the current index is 107, it means the dollar has appreciated by 7% against this basket of currencies since 1973. You can easily find real-time quotes and charts on major financial websites like TradingView.
This ‘basket of currencies’ is not randomly selected but consists of six major developed country currencies, each with a different weight:
From the table above, it’s clear that the Euro accounts for more than half of the weight. This means the trend of the Dollar Index is highly negatively correlated with the Euro-to-Dollar (EUR/USD) exchange rate. When the Euro weakens, the Dollar Index tends to strengthen, and vice versa. This is also why the policy moves of the European Central Bank (ECB) are a critical factor that cannot be ignored when analyzing the Dollar Index.
After understanding the basic concept of the Dollar Index, let’s break down how Trump’s trade protectionist policies have gradually elevated the dollar. There are two clear, interconnected transmission paths behind this.
The Trump administration’s imposition of high tariffs on all imported goods (with rates on some Chinese goods as high as 60%) has the most direct consequence of pushing up domestic production costs and final consumer prices in the U.S., i.e., inflation. To curb this beast, the Federal Reserve (Fed) has had to maintain its high-interest-rate policy for a longer period. This action has produced two major effects:
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Faced with the U.S. tariff stick, many export-oriented economies, such as the Eurozone and Japan, are often forced to devalue their currencies to maintain the export competitiveness of their products. This creates a vicious cycle of a ‘devaluation race.’ Taking the Japanese Yen as an example, from late 2024 to early 2025, its exchange rate against the dollar plummeted from 139 to 156, a staggering depreciation. This phenomenon has objectively strengthened the relative value of the U.S. dollar, ultimately creating a situation of ‘U.S. raises tariffs, other countries devalue, dollar strengthens.’
The impact of tariff policy is by no means limited to the currency market; its shock to the real economy is more profound and complex, mainly reflected in the following three aspects, which also explains why market risk aversion is so high.
Trump’s tariffs on key industries such as steel, aluminum, semiconductors, and electronic products have forced many multinational corporations to rethink their global supply chain layouts. For example, many companies that originally produced in China have shifted their production capacity to Southeast Asia or Mexico to avoid punitive tariffs of up to 60%. However, this relocation process is fraught with challenges, including logistical disruptions, technical adjustments in new factories, and labor training. These additional costs are ultimately passed on to the prices of final products. According to ING’s calculations, the comprehensive cost of the global supply chain could increase by 15% to 20% in 2025, and the ones footing the bill will ultimately be global consumers.
For countries dependent on commodity exports, the combined effect of a strong dollar and tariff barriers is undoubtedly adding insult to injury. Take Canada, for example. Its main exports, such as crude oil and lumber, are hindered by U.S. tariffs, while the strong dollar also suppresses international raw material prices. This has led Canada to face a double blow of ‘declining export volumes’ and ‘currency depreciation.’ In February 2025, the Canadian dollar depreciated by more than 3% against the U.S. dollar in a single month, hitting a five-year low and significantly increasing the country’s fiscal deficit risk.
Currently, financial markets are divided on the long-term impact of the tariff policy. In the short term, risk aversion is undoubtedly the main driver pushing the Dollar Index higher. However, in the long run, many analysts point out that the Trump administration will face significant challenges in renewing its tax cut legislation, and the strength of fiscal stimulus may not be as strong as the market expects. This high degree of uncertainty has led to a sharp increase in volatility in the stock and foreign exchange markets. For example, in February 2025, the Dow Jones Industrial Average once fluctuated wildly by more than 500 points in a single day due to a piece of tariff news.
A strong dollar is the current theme, but can this trend continue? As investors, we must closely watch the following three variables, as they will determine the next move of the Dollar Index.
The impact of any policy has its limits. If the Trump administration further expands the scope of tariffs, for example, by imposing heavy taxes on the European auto industry, market risk aversion may continue to support the dollar. Conversely, if the policy shifts towards negotiation and consultation, risk aversion will cool, and the Dollar Index is likely to fall below 105. Looking back at the history of the 2018 U.S.-China trade war, the Dollar Index once surged to 96 due to tariff escalations but fell back as a trade agreement was signed.
The market has already priced in the expectation of a one-quarter-point rate cut by the Fed within the year. However, if the imported inflation caused by tariffs far exceeds expectations, the Fed’s policy may turn hawkish again. Goldman Sachs analysis indicates that if the annual growth rate of the U.S. core Personal Consumption Expenditures (PCE) price index exceeds the warning line of 3.5%, it could force the Fed to reconsider raising interest rates, which would provide more solid support for the dollar’s strong position.
America’s unilateral policy is prompting other countries to accelerate their search for countermeasures. For example, China is mitigating the pressure of declining exports by expanding its domestic market and increasing its fiscal deficit; the European Union is actively promoting its Carbon Border Adjustment Mechanism (CBAM) to establish its own trade barriers; and ASEAN countries are accelerating regional free trade agreements. If these countermeasures can be effectively implemented, they will weaken the actual impact of U.S. tariffs to some extent, thereby reducing the depreciation pressure on non-USD currencies, and the upward momentum of the Dollar Index will subsequently weaken.
Faced with such a complex situation, investors should not sit idly by. In a strong dollar environment, a clear investment strategy is crucial.
In a landscape where the dollar is uniquely strong, concentrating all assets in dollar-denominated goods is extremely risky. Smart investors will diversify their allocations moderately, for example, by increasing holdings of currencies with low correlation to the dollar (such as the Swiss franc) or by including traditional safe-haven assets like gold in their portfolios to hedge against the systemic risks brought by the excessive strength of a single currency.
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One of the core impacts of tariff policy is inflation. Therefore, it is particularly important to invest in assets that can resist the erosion of inflation. In addition to gold, Treasury Inflation-Protected Securities (TIPS), blue-chip stocks related to consumer staples, and some infrastructure and energy stocks are all assets worth paying attention to.
A strong dollar often puts pressure on emerging markets through capital outflows and debt crises. Therefore, investors should carefully assess the risks of holding emerging market assets. However, opportunities also exist within crises. For countries with solid economic fundamentals, low levels of foreign debt, and the ability to benefit from supply chain shifts (such as some Southeast Asian countries), there may be investment opportunities for value reassessment after market sentiment stabilizes.
A rising Dollar Index means the U.S. dollar is appreciating against a basket of major currencies. For the global market, this typically means:
For the U.S. itself, it could lead to reduced export competitiveness but lower import costs.
Generally, the Dollar Index has a “negative correlation” with the prices of gold and crude oil. Because these commodities are primarily priced in U.S. dollars on the international market, when the dollar appreciates, it becomes more expensive for buyers holding other currencies to purchase them. This can lead to decreased demand and, consequently, lower prices. Conversely, when the dollar depreciates, their prices tend to rise.
Individual investors can participate in Dollar Index investing indirectly through various financial instruments. Common channels include:
The surge of the U.S. Dollar Index is not just a numerical jump; it is a microcosm of the current disorder in global economic governance and the rise of trade barriers. For investors, this is an era full of challenges and uncertainties. As Nixon-era Treasury Secretary John Connally famously said, “The dollar is our currency, but it’s your problem.” In the current situation, blindly chasing the strong dollar or panic-selling non-USD assets are not wise moves. Only by deeply understanding the driving factors behind the Dollar Index’s trend, maintaining a flexible asset allocation, and constantly monitoring global policy developments can one navigate through the cycle steadily and find one’s own point of financial balance in this fragile equilibrium.
