The US dollar strengthened modestly ahead of a crucial diplomatic meeting, with the WSJ Dollar Index rising 0.2%, as traders closely watch President Trump’s high-stakes talk with Ukrainian President Volodymyr Zelensky.

However, beneath this temporary strength lies a much more complex story of structural challenges tied to the economic fallout from Trump's tariffs that could erode the dollar's value in the months ahead.

Geopolitical uncertainty, safe-haven demand

Safe-haven demand has supported the dollar's rise ahead of today’s 1:15 pm ET meeting between Trump and Zelensky. Safe-haven status refers to the dollar’s role as a preferred currency during times of global uncertainty. Investors often buy dollars when geopolitical risks rise, as it is seen as a stable and liquid asset that preserves value even when markets are volatile.

The Trump-Zelensky meeting follows Trump’s summit with Russian President Vladimir Putin in Alaska, which ended without a concrete peace agreement.

Trump has hinted that Zelensky could end the war “almost immediately” by conceding territory to Russia and abandoning NATO membership aspirations, an approach raising alarm among Ukrainian officials and European allies. 

This round of talks is especially significant given the presence of European leaders, including German Chancellor Friedrich Merz, French President Emmanuel Macron, and British Prime Minister Keir Starmer. Together, they aim to press Washington for continued support for Ukraine.

Market sentiment remains cautious, with traders betting on risk assets if peace progress is made, while bracing for volatility if talks collapse.

The Federal Reserve’s policy dilemma

Alongside geopolitical factors, monetary policy complicates the US dollar outlook in 2025. Federal Reserve Chair Jerome Powell has acknowledged that Trump’s tariffs create a “two-pronged policy challenge,” pushing the Fed further from its inflation and employment objectives.

Normally, the Fed tries to keep inflation low and support jobs at the same time. But Powell warned that tariffs could force the Fed to choose between the two goals. For now, the central bank has kept interest rates steady at 4.25% to 4.50%, with officials saying tariff uncertainty makes it too risky to cut rates.

Trump’s tariffs trigger inflation

The strongest drag weighing on the dollar is Trump’s expansive trade policies. Analysis from Yale’s Budget Lab shows that tariffs implemented through August 6, 2025, including a 50% tariff on India, will raise consumer prices by about 1.8% in the short term, equivalent to a $2,400 loss in average household income. 

Lower-income families bear the heaviest burden, losing around $1,300 annually. Tariffs on essentials such as shoes and apparel are especially steep, raising costs by 39% and 37% respectively.

Tariff burden shifts from corporations to consumers

Initially, US companies absorbed most of the tariff costs. JPMorgan economists noted that firms were “eating the tariff cost at the expense of their profit margins.” But a Goldman Sachs forecast suggests a major shift by October, where consumers could carry 67% of the tariff burden, up from 22% in June.

This shift threatens consumer spending, the backbone of US economic growth. Commerzbank analysts cited by The Wall Street Journal warn that once firms pass on tariff costs, inflationary pressure will mount, weighing on demand and weakening the dollar medium term.

Goldman Sachs, JPMorgan bet against the dollar

Global banks are becoming pessimistic about the dollar. JP Morgan Global Research adopted a negative stance in March 2025 for the first time in four years. Goldman Sachs also projects a significant dollar decline over the next year, about 10% against the euro and 9% versus the Japanese yen and British pound.

The average US tariff rate surged from 2.2% in December to 9.0% in June, the fastest increase on record, even compared with the Smoot-Hawley tariff era.

So far, 2025 has been the dollar’s worst first half since 1991, with the US Dollar Index down nearly 11%. Investor skepticism about US fiscal strength and policy direction is growing, further pressuring the greenback.

In the near term, geopolitical uncertainty and safe-haven demand provide support for the dollar. But structural challenges tied to tariffs, inflation, and consumer strain point to longer-term vulnerability. If the Federal Reserve is forced to maintain restrictive policy while growth slows, the dollar could lose more of its value in the months ahead.