The U.S. dollar is experiencing its worst start to a year since 2008, with the U.S. Dollar Index (DXY) falling 4.2% (Chen, 2025) year-to-date amid concerns over the Trump administration’s unpredictable economic and foreign policies. Most of the decline occurred in recent months following the imposition of tariffs on Canadian and Mexican goods. Surprisingly, both the Canadian dollar and Mexican peso gained strength against the USD. European currencies have been the biggest winners of the White House’s economic and political reorientation. The euro is up about 4.5% (Chen, 2025) in the past week, boosted by Europe’s plans to increase defence spending and stimulate the economy in response to America’s increasingly fractious relationship with the continent. This decline contradicts the administration’s stated goal of maintaining a strong dollar.

The decline of the US dollar against major global currencies, combined with US-imposed tariffs on key trading partners like China, presents Bangladesh with opportunities to reduce pressure on its foreign exchange market and potentially boost its apparel exports to the United States.

Why Is the US Dollar Weakening?

But what is wrong with the new US policy, and why is it weakening the dollar? Let’s examine the situation from a macroeconomic perspective.

It is unusual for the US dollar to fall when the US imposes tariffs, because tariffs reduce the demand for foreign goods in the USA, which should weaken foreign currencies — but what’s happening is quite the opposite.

Interest rates are a major factor in the dollar’s value. US interest rates are high compared to other countries, and because of the higher interest rate, the demand for US bonds increases — as does demand for the dollar, because investors need dollars to buy those bonds.

In late 2024, the dollar was rising due to strong economic data: inflation was slowing, the job market was strengthening, and people thought interest rates would stay high for a while — this made the dollar more attractive. But recent events in Washington have made investors nervous. New tariffs, government budget cuts, and global tensions have made the U.S. economy look less stable — and this is bad for the dollar.

Due to the volatility, fears of stagflation (slow growth and high inflation) are growing. If the economy slows while price levels still rise, the situation becomes difficult, and it may force the Federal Reserve to cut interest rates — which would further weaken the dollar.

Investors now expect multiple interest rate cuts in 2025. Earlier, they thought there would be just one cut, but now they are expecting three or more, which lowers the dollar’s appeal.

To put it simply: the dollar is falling not just because of tariffs, but because investors are worried the U.S. economy might slow down. If that happens, the Fed might cut interest rates to help — and lower rates usually lead to a weaker dollar.

Impact of a Weak Dollar on Bangladesh

A weaker US dollar is likely to make imported goods cheaper for other countries, which can help Bangladesh control domestic prices. If the US Federal Reserve cuts interest rates, it will also reduce the borrowing cost for Bangladeshi banks and businesses when taking loans from foreign lenders. This could give Bangladesh Bank some relief and reduce the need to further devalue the Taka in the near future.

Over the last three years, the Taka has lost nearly 40% of its value against the US dollar (from Tk85 to Tk122). This depreciation mainly happened due to US interest rate hikes, which strengthened the dollar — especially after the Russia-Ukraine war began in 2022.

However, recently the US dollar has been weakening against major global currencies like the euro and yen. This is happening because investors are becoming concerned about tariffs and geopolitical tensions, and they are moving their investments to safer currencies such as the yen and Swiss franc.

These developments could help stabilise the Taka, as a weaker dollar reduces the pressure to devalue the Bangladeshi currency further. Lower US interest rates will also boost confidence among banks and businesses in Bangladesh, as it becomes cheaper to access foreign financing.

Countries that hold their foreign exchange reserves in non-dollar currencies will benefit more from a weakening dollar. However, Bangladesh is not expected to gain much from this, as 90% of its reserves are held in US dollars. Therefore, there will be no major changes in Bangladesh’s monetary policy for now.

Still, a weaker dollar will make it easier and more affordable for private sector companies in Bangladesh to access foreign loans.

Tariffs on China: A Window for Bangladesh

Additionally, high tariffs on Chinese goods in the US — some exceeding 100% — are making Chinese imports more expensive. This opens up opportunities for other countries like Bangladesh, Vietnam, and Cambodia to supply products, especially in the garment sector. US buyers are already shifting their sourcing to alternative markets to avoid high costs and maintain smooth supply chains.

As a result, Bangladesh is likely to receive more orders to fill the gap left by reduced imports from China.

Risks from a Slowing US Economy

However, the ongoing trade tensions and high tariffs may slow down the US economy and drive inflation higher. This could push the US toward a recession, which is a concern for Bangladesh, as it may lead to reduced consumer demand.

China has already been losing market share in the US, and more investors may shift their focus to countries like Bangladesh. While this could help increase Bangladeshi exports, the weaker dollar also means that Bangladeshi products become relatively more expensive in the US market, which could reduce demand.

Moreover, high production costs in the US make it difficult to replace imported garments. For example, if an imported shirt costs $40, producing the same shirt domestically might cost $100. This cost increase could lead to inflation in specific product categories and reduce consumer demand.

Bangladesh’s Export Surge and Competitive Edge

Despite these challenges, Bangladesh’s apparel exports have shown strong growth. In January 2025, exports to the US increased by 45.93%, as American buyers diversified away from China due to the competitive pricing offered by Bangladesh.

Balancing Risks and Gains

While US inflation is lowering demand and affecting exports, the benefit of cheaper imports for Bangladesh may help balance the overall trade impact.

Author: Abu Yousuf Abdullah