What’s going on with the U.S. dollar? The greenback’s bumpy ride so far this year, including a drop to its lowest level since 2022, has caught the attention of investors and traders around the world, helping drive gold and silver prices to all-time highs and deepening concerns that the U.S. may stray from its strong dollar policy. While statements from the U.S. administration appear to have calmed the waters for now, the Financial Post’s Barbara Shecter explains what’s been driving the recent volatility and what the future could hold for the world’s primary reserve currency.

What’s going on with the greenback?

After a strong start to 2026, the U.S. dollar began to sink with amid concerns about U.S. President Donald Trump’s

threats to take over Greenland and his ongoing challenges to the independence of the Federal Reserve. The slide deepened this week amid fears the United States and Japan were preparing to jointly intervene to shore up the sagging yen, which had been trading lower as Japan’s government prepares to ramp up spending on defence and social security and scrap consumption taxes.

The greenback slid further, to a four-year low, after Trump said he wasn’t concerned about the decline against a basket of global currencies, but steadied on Wednesday after U.S. Treasury Secretary Scott Bessent calmed concerns over intervention to support the yen.

Why would the U.S. intervene to support the yen?

Japan and the U.S. are closely linked through Japan’s sizeable investment in U.S. Treasuries, which is supported by the so-called carry trade, where investors borrow in low-yielding Japanese bonds to buy higher-yielding U.S. Treasuries. But the carry trade becomes less attractive when yields on Japan’s debt rise, as they did earlier this month on concerns over election promises of increased government spending and tax policy that would reduce government revenues.

The selloff of Japan’s government bonds spilled over into the U.S. Treasuries market, where yields rose. If Japan intervened alone to staunch a declining yen, it would likely mean more selling of U.S. Treasuries, something the U.S. doesn’t want to see, particularly against the backdrop of a “sell America” trade that is already putting pressure on the market for government securities. So, according to reports last week, the U.S. Federal Reserve made calls to dealers asking for quotes on trades that would see it purchase yen and sell U.S. dollars, something known as a “rate check.”

What was the impact of ‘rate check’ reports on currencies?

The Fed’s rate checks had their desired effect, improving the yen’s fortunes, but driving the U.S. dollar down further. “Even … without actually transacting, (this) scared off those who were shorting the yen, causing it to strengthen and the U.S. dollar to weaken against the yen,” said Avery Shenfeld, chief economist of CIBC Capital Markets. But the decline, combined with Trump’s comments, fuelled ongoing speculation that the U.S. might be trying to drive down the value of the greenback against other currencies.

While there are downsides to a weaker greenback, it would fit with Trump’s drive to reduce imports and shore up homegrown industries through tariffs and could, at least in theory, eventually help the government deal with pressure from its growing debt load, which now stands at US$38 trillion. Bessent said Wednesday that abandoning America’s strong dollar policy is not the administration’s plan.

What is the debasement trade and how is it part of what’s going on with the U.S. dollar?

The debasement trade refers to market positioning around an expected prolonged decline in the value of a currency. An example is buying hard assets such as gold or silver as a substitute for the U.S. dollar, which pushes up the price of the precious metals, Shenfeld said.

Douglas Porter, chief economist at BMO Financial Group, likened the trade to “de-dollarization” or moving away from the U.S. dollar. “There is no doubt that some countries would like to, and are actively, moving away from the U.S. dollar, which is one of the reasons the currency has softened over the past year,” he said. “And, yes, the recent softening may be (a) small part of that trend. It’s no coincidence that the recent dollar softness erupted after the tensions around Greenland.”

Gold and silver are surging. What do all these trends mean for Canada?

U.S. dollar declines are a mixed bag for Canada’s economy and investors. Shenfeld said Canadian equities could get a boost from the rise in precious metal prices, since gold mining stocks have a fairly significant weight on the Toronto Stock Exchange.

Porter said that while the surge in gold is related to the weakening in the U.S. dollar, it’s not the only driver. “In general, following the big inflation of a few years back, and along with the move by some central banks to diversify away from the U.S. dollar, gold has won by default,” he said. “Of course, that’s been a windfall for the TSX and its miners.”

What about consumers and businesses?

If the U.S. dollar falls, Canadian consumers enjoy increased purchasing power of imports from the U.S., but exporters might take a bigger hit from tariffs, said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “

If the U.S. (dollar) depreciates much further, then the resulting higher value of the Canadian dollar could reduce the ability of our exports to adjust to tariffs,” he said. “It could also make investing in Canada less attractive if (the Canadian dollar) is less undervalued.”

So far, the U.S. currency decline has merely reversed an earlier weakening of the loonie, and has not been material enough to alter economic forecasts, Shenfeld said. “If it continued, a strengthening Canadian dollar could put a bit of downward pressure on inflation by making imports cheaper, and in turn give the

Bank of Canada more room to cut interest rates further if the economy faltered,” he added.

What does this mean for Canada’s institutional investors?

There have been discussions over the past year among Canada’s largest pension funds about now to handle their exposure to the U.S. dollar and U.S. assets. Jim Keohane, the former CEO of the

Healthcare of Ontario Pension Plan (HOOPP) who now sits on the board of Alberta Investment Management Corp. (AIMCo), said foreign exchange is a concern for funds that invest heavily in the United States.

“If the U.S. dollar weakens due to the political uncertainty, it can overwhelm the returns you earn on U.S. assets,” he said.

Jo Taylor, chief executive of the Ontario Teachers’ Pension Plan Board , said in an interview with Bloomberg at the World Economic Forum in Davos this month that his fund had lightened up on the U.S. dollar and treasuries in the first quarter of last year. He attributed that decision to “risk of a deflationary dollar.”

In a report Thursday, DBRS Morningstar said a shift away from U.S. dollar borrowing by Canadian pensions has continued, with U.S. dollar-denominated issuance falling to its lowest level in six years. At the same time, issuance in other currencies has expanded to support global investment strategies, the ratings agency said.

What about the global impact? How big a concern is all this?

U.S. dollar depreciation isn’t as worrisome as it might seem at first glance because it comes after a long run of dollar appreciation against other major currencies, according to economists.

“Against a basket of major currencies, the U.S. dollar is still about six per cent stronger than it was five years ago,” Shenfeld said. “There’s an established tendency for this sort of mean reversion in the U.S. dollar, in which a multi-year trend towards a stronger greenback gets reversed over subsequent years.”

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A real free-fall in the greenback would be of concern if it also led to soaring long-term interest rates, he said, but 10-year Treasury yields have only edged up slightly.

Holt said the dollar’s decline has been manageable — so far. “But the world economy benefits from a strong dollar that, by corollary, means weaker foreign currencies able to absorb shocks like tariffs,” he said. “An abrupt move in the U.S. (dollar) — which I wouldn’t say this is so far — could be destabilizing to the world financial system.”