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Why is this happening? The short answer is that the world is selling off America.

In 2025, the value of the U.S. dollar against other currencies dropped by more than 9%. It dropped another 1% in recent days, a seemingly small change, but one that implies fairly large declines through 2026 with tough consequences for Americans.

Normally, currency fluctuations go unnoticed, unless you are buying a foreign car, the newest bottle of French wine or travelling overseas. But, a 10% decline since January 2025 is large enough to affect overall economic performance. At the current rate, we should expect it to be down by another 15% in 2026.

A currency decline of 25% in two years is the kind of collapse we’d expect from a banana republic, which makes perfect sense for us now. There are three big reasons for the decline.

The first is our national debt, which will grow substantially in 2026. We should have expected that because roughly a quarter of our total national debt was accrued under a Trump presidency. So, we should expect it to blossom in an unfettered second term.

The second challenge is our frankly bizarre and counterproductive foreign policy. As I wrote last week, our former allies (you know them as all the world’s stable democracies) are busying themselves with divesting of America. The drop in foreign direct investment last quarter was the worst of any post-World War II quarter not associated with a recession in either Europe or the U.S.

It is worth noting that foreign direct investment accounts for close to 9 million jobs in the U.S. So, totally nothing to worry about, right?

On the government side, our allies are selling U.S. securities and disentangling themselves from our defense industries. Anyone engaged in a military alliance involving the purchase of weapons systems will look 20, 30 or even 60 years down the road. They want to buy U.S. weapons systems from makers such as Cummins, Raytheon, Lockheed Martin and GE Aerospace. But, our allies must rely upon an America that will stay in an alliance, supply spare parts and training.

Our allies are making cold calculations: A nation that elected Trump cannot be trusted as a 50-year partner. Yes, I know that might be unfair. Most Trump voters didn’t anticipate anything like the current maelstrom. That won’t matter.

Finally, our failing internal political environment is a major contributor to the dollar’s collapse.

Across the world, in every major financial sector firm, there are teams of finance and economic specialists attempting to model risk. We’ve become a high-risk bet. That means there’s good cause to dump our currency as a secure asset, less reason to invest in America and much less reason to lend us money through bond purchases.

We are a declining asset.

In a canonical model of trade, a lower-valued currency will promote exports and decrease imports. But, such a model also makes clear our trade deficit is caused by our federal budget deficit, and a lower-valued dollar will cause this deficit to rise.

Without courage in Congress, and spiraling political decline, we will end 2026 with a larger federal debt, a far lower-valued dollar and less foreign investment than we started with. At the same time, our trade deficit will rise to new records.

How will we feel this in our pocketbooks? There are three ways.

First, buying anything that has any imported parts will be more expensive. Nearly all American-made goods will be pricier. This won’t be wildly inflationary, only 4% to 6% extra over the coming year and a bit higher for automobiles.

Second, borrowing costs will rise. The dollar will have less worth, and so lenders offering you money to buy a new car or a new home or to start a business will want a higher rate than they would’ve otherwise asked. The only silver lining is that a recession might counterbalance that in keeping rates a bit lower.

Lower demand for goods and services, accompanied by a lower level of employment, less capital investment, higher interest rates and big shocks to prices of imports are a perfect recipe for a recession.

Now, normally I write columns to help change the direction of economic policy. I want the economy to improve over time. It is far too late for the current administration to do anything about this in the short run. We are locked in for 2026 and beyond.

The massive deficit has been decades in the making, with legislators from both parties sharing blame. But this year’s debt catastrophe belongs exclusively to the Republican Party. The foreign policy disaster driving away our allies? That’s Trump and his inner circle. The violence, division and institutional decay at home? That flows directly from the White House. The buck stops there.

Michael J. Hicks is professor of economics and the director of the Center for Business and Economic Research at Ball State University. He previously served on the faculty of the Air Force Institute of Technology’s Graduate School of Engineering and Management and at research centers at Marshall University and the University of Tennessee. His research interest is in state and local public finance and the effect of public policy on the location, composition, and size of economic activity. 

The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body. Also, the views and opinions expressed do not necessarily reflect the views of The Indiana Citizen or any other affiliated organization.