- If you had, say, $10,000 in a savings account in early January of this year, you would've been able to exchange it for about 9,800 euros.

But by the beginning of July, that 10K would've only been worth about 8,500 Euros.

Why?

Dollar depreciation.

- Now swings in the value of the dollar are not unusual and wouldn't ordinarily stop the presses, but the cause and manner of this rapid depreciation does have some economists wondering if it's the beginning of the end of the global dominance of the U.S. dollar.

- And some say that might not be a bad thing.

(bright music) - What makes the dollar so dang important?

Well, just like two people can't communicate unless they speak a common language, they also can't do business without a common currency.

And for the last 80 or so years, that common currency has been the U.S. dollar.

If you wanna know how it got that way, check out our video on the history of the dollar.

- There are two main things that make the dollar a good global reserve currency.

First, our economy is big.

There are a lot of things you can buy with dollars, especially financial instruments like stocks, bonds, and derivatives.

Secondly, we are a very stable country, both economically and politically.

No coups, no civil wars recently, no dramatic policy shifts.

This has made U.S. dollars and treasury bonds very safe to own.

So if you're a small country that needs to have a lot of foreign currency on hand to make deals, it makes sense for it to be dollars.

- So what's happened recently that lowered the value of the dollar?

Well, in a word, tariffs, but not in a way that anyone expected.

See, the dollar's value is relative to the value of other country's currencies, and the value of a country's currency is largely influenced by the demand for its exports, among other factors.

So theoretically, if the point of our tariffs is to decrease demand for foreign goods, that should also decrease the value of foreign currencies.

Thereby, raising the value of our dollar.

- But that's not what happened.

Instead of the boosts that economics would expect, we saw a decline in the dollar's value.

Why?

A clue may lie in another unexpected economic anomaly.

Typically, in times of global financial uncertainty, American treasury bonds sell like hotcakes.

As far as investments go, the U.S. T-bond is as safe as it gets.

So when investors are feeling wobbly, that's where they flock.

- Furthermore, interest rates on T-bonds are relatively high, which should have made them even more attractive to investors.

But after a brief initial surge, there was actually a selloff of U.S. treasury bonds.

One of the only plausible explanations for this is that because the U.S. is the source of this uncertainty, U.S. assets are no longer considered as safe as they once were, including the U.S. dollar.

- But unless you have an overseas vacation planned, you might not understand why you should care about this.

Sure, the dollars in your bank account are worth less than they were, but since your boss, your landlord, and your grocer all use dollars, too, there's no net difference in your day-to-day income and expenses.

In fact, some people think we'd be better off if the dollar weren't worth quite so much.

- [Philip] That's because U.S.-made products are sold in U.S. dollars, so the more the dollar is worth, the more expensive our products are for other countries to buy.

If you're an American car manufacturer, no matter how much you cut costs, the fact that you sell your cars in dollars puts you at a global price disadvantage.

The theory is that if the dollar lost enough value, and perhaps, even ceased to be the global reserve currency, U.S. manufacturing would be unshackled from its financial handicap and free to expand.

- In 2003, the Economic Policy Institute estimated that more than one quarter of the 2.6 million jobs lost in manufacturing since 1998 were due to the overvalued U.S. dollar.

The union-affiliated think tank also predicted that the decline in the dollar's value that began in 2002 would create somewhere around 330 to 530,000 new jobs, primarily in manufacturing.

That didn't happen.

- In fact, despite a historic depreciation of the dollar, the 2000 saw an unprecedented loss of U.S. manufacturing jobs.

This was for a number of reasons, including automation and China entering the global marketplace.

The global economy, it turns out, is very complex, and you can't draw a direct line from the value of the dollar to U.S. employment numbers.

- But there are some direct advantages of a strong dollar, and perhaps the main one is cheap imports, from cars to TVs to textiles.

Americans enjoy lower prices on a wide variety of goods because other countries want our currency.

If tariffs raise consumer prices, as a number of major retailers warn, a depreciated dollar may exacerbate the damage.

- Another advantage is cheap debt.

Foreigners currently hold more than $1 trillion of U.S. cash, plus over $8 trillion of U.S. treasuries.

This amounts to a massive loan that the rest of the world gives to the U.S. for little to no interest.

Former President of France, Valery Giscard D'Estaing, referred to it as our exorbitant privilege.

It gives American residents access to more affordable loans and allows our government to finance stimulus packages in times of economic strife.

- For instance, in response to both the 2008 financial crisis and the COVID pandemic, the Fed increased the money supply to rescue the country from recession.

And because dollars are always in such high demand, this did not create the kind of inflationary crisis it could in other countries.

Yes, there was a temporary spike in inflation after COVID, but it was nowhere near as bad as it was for the rest of the world.

That's our exorbitant privilege in action.

- The dollar status as the global reserve currency also affords us potent political power.

With more than half of all global trade happening in dollars, we have immense influence over the plumbing of the global economy and can use that leverage to pressure other nations.

For example, in response to Russia's invasion of Ukraine in 2022, the United States and our allies froze over $300 billion of their foreign-held assets and restricted their access to financial systems, like credit cards and international banks.

- Most economists agree that for the U.S., the benefit of a strong dollar outweigh the negatives.

Yet the Trump administration still maintains that we are being ripped off by the global economy and wants to use the leverage we have to get a better deal.

After all, any shrewd landlord will tell you that if you control the pipes in a building, that puts you in a good position to squeeze the tenants.

- But this leverage only exists because other countries see the dollar, and by extension, our fiscal policy as stable and predictable.

Yes, we've used our position to bully others around a bit, but by and large, we've been a pretty benign economic landlord, and that's kept other countries happy enough to keep using dollars for all their foreign trades.

But if we try to squeeze them too hard or make too many chaotic policy changes, they may look for an alternative.

And some economists worry that this drop in the dollar may be an early warning sign.

- Leading candidates to replace the dollar, like the Euro, the Chinese Yuan, or even crypto are still far from viable.

- But if it did happen, American manufacturing might be slightly more competitive in exchange for higher import prices, higher borrowing costs, and fewer options for dealing with financial emergencies.

- Only then will we know if it's an exorbitant privilege or an unfair burden.

- [Both] And that's our two cents.