Lexicon Financial Group Weekly Update — August 6, 2025

Aug 8

“Nothing lasts forever—not even your troubles.”

— Arnold H. Glasow, American businessman and humorist

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

ISSUE 191

Looking Around

In 2008, I was in a car, travelling to a conference in Calgary with a colleague. We were listening to some rock-and-roll station. They really are the same in every city in Canada, aren’t they? Anyway, the disc jockey (radio announcer for the younger readers) was talking about how the Canadian dollar had just passed “par” with the U.S. dollar (dollar), so it would be a great time to invest.

A word of caution: I don’t recommend taking advice from rock-and-roll radio DJs.

But currency is getting talked about more and more lately. Especially the dollar, which for years has been considered the preferred currency for global trade.

The dollar slumped more than 10 per cent in the first half of 2025. Many suggest that it was overvalued, so a sell-off makes some sense. To be fair, a weaker dollar means that buying things from other countries becomes more expensive, which aligns nicely with the current policy of placing tariffs on imported goods. Sure, this trickles through the economy because the cost of imports (parts, supplies) goes up, but the effect isn’t as dramatic.

Globally, though, confidence in the dollar appears to have become less automatic than it once was. This is significant, as trust is the intangible but irreplaceable asset backing any currency.

A recent sign of this loss of confidence is that U.S. Treasury markets have experienced significant volatility this year. There are growing concerns about rising U.S. debt levels, inflation fears, the impact of U.S. trade policies, and the potential for a recession. What’s stoking those fears is that there is a non-zero possibility that the U.S. may not be financially able to pay its debts. That said, at the spring International Monetary Fund-World Bank meetings this year, leading financial officials who spoke at the Atlantic Council publicly hadn’t changed their view that there wasn’t really a better option to replace the dollars as the leading global currency. Privately, however, many expressed an increasing desire to find alternatives. (1)

U.S. President Trump’s stop-start approach to tariffs and global agreements has revived doubts about the reliability of the U.S. as an economic and political partner on the world stage during his first term. The U.S. returned to diplomacy under President Biden, much to the relief of its global partners. These partners welcomed the U.S. back as a partner in good standing again. Unfortunately, this welcome came with baggage – the scarring and pain from their interactions with the first Trump administration – which has started increasing again since Trump took office earlier this year. This is what happens when uncertainty prevails. Trump’s tax legislation, which he recently signed into law and is expected to add $3.4 trillion to the federal deficit, has also added to these concerns.

The dollar is still the currency that underpins a global monetary system, where central banks rely on it to stabilise their economies, manage debt and implement trade policies. Despite recent shake-ups, the dollar still remains deeply embedded in the global system because of its longstanding history of resilience.

In case you did not know, the dollar was put on this course in the 1930s, when President Franklin D Roosevelt centralised U.S. gold reserves and tied the dollar to a fixed supply of gold. Then, in 1944, the U.S. spearheaded the Bretton Woods Agreement, which pegged international currencies to the dollar, leading to the creation of the International Monetary Fund (IMF) and the World Bank. With most of the world recovering from World War II and the U.S. holding the majority of global gold reserves, the U.S. dollar emerged as the anchor of the post-war financial system. By the 1960s, this gave the U.S. what former French Minister of Finance Valéry Giscard d’Estaing called an “exorbitant privilege.”

In 1971, U.S. President Richard Nixon severed the last remaining ties to the gold standard, which allowed the dollar to float freely in the open market. Despite the wave of changes, the U.S. economy remained strong, bolstered by its growth in manufacturing and information technology, which helped the dollar maintain its status.

Since then, the dollar’s dominance has increased, even as countries like China have outpaced the U.S. in economic growth, population and manufacturing output. The U.S. has continued to wield disproportionate influence through trade agreements and financial sanctions because many times, even between emerging markets, when one converts a currency, like the Brazilian real and the South African rand, for example, there is a transaction to U.S. dollars in between. Accordung to EconoFact, 54 per cent of global exports are invoiced and settled in dollars and the dollar is involved in 88 per cent of all currency trades. U.S. extraterritorial power stems from this because other countries and central banks don’t want to lose their access to the dollar-based financial system.

This also adds weight when the U.S. imposes sanctions because having a reserve currency gives it more flexibility to impose financial sanctions. This is why the financial sanctions imposed on Russia after its invasion of Ukraine led to a default on Moscow’s sovereign debt. In 2022, sanctions from the administration of U.S. President Joe Biden effectively cut Russia off from dollar-based trade, freezing US$300bn in assets held by its central bank and crippling its economy.

There are groups of nations that have recently increasingly positioned themselves to take on a larger role in global finance. So far, none has managed to match the dollar’s influence. But some are attempting to challenge this status of the dollar. BRICS (Brazil, Russia, India, China, South Africa) nations have moved to reduce their reliance on the dollar in recent years. China has even pushed for “de-dollarisation,” by promoting its currency, the yuan, and by forming currency swap agreements with other countries. The European Central Bank has also been advocating for the euro to play a more central role in the global system.

If the dollar ever did lose its status, it would mean higher borrowing costs in the U.S. Without foreign demand for U.S. debt, interest rates would rise, driving up the cost of mortgages and credit cards because U.S. banks peg their interest rates to those of the Federal Reserve (Fed). The U.S. would lose much of its leverage to influence global trade and enforce sanctions – international trade that does not directly involve the U.S. often runs through the dollar.

Economists argue that it is unlikely the dollar will lose its status as the world’s reserve currency. And, if it did, it might take decades to even see a minor shift. Many experts say a more realistic future could involve a multipolar currency system, where the dollar shares its role with other major currencies, including China’s yuan and Europe’s euro. (2)

This is not to say that concerns about the dollar should be ignored, especially if the U.S. is increasingly perceived as an unreliable economic and political partner. For now, the dollar is still, like cash, king. But then again, nothing lasts forever.

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

Crude calculations: Assessing Canada’s vulnerability to oil prices

Transmission framework: How tariffs will flow through the US economy

Investor confidence in EU drops after Trump’s Brussels trade deal

A Summer of Reckoning for Japan’s Economy

China’s affluent are as pessimistic about the economy as they were during the Covid-19 pandemic

Raymond James Markets & Investing: The Federal Reserve is balancing a split economy- CIO Larry Adam, August 1, 2025

Raymond James Economy & Policy: Employment number worse than feared in July - Chief Economist Eugenio J. Alemán, August 1, 2025

Looking Back

Since we have been talking about the U.S. dollar, let’s look at how the Canadian dollar is doing. It rebounded from a two-month low against its U.S. counterpart last Friday, as weaker-than-expected U.S. jobs data raised expectations for Federal Reserve (Fed) interest rate cuts, offsetting an escalation in the U.S. trade war with Canada. The loonie was trading at 1.38 per U.S. dollar, or 72.46 U.S. cents, after earlier touching its weakest level since May 22 at 1.3879.

All 10 major sectors on the TSX ended lower, led by a 2.4 per cent decline for technology. Energy lost 1.9 per cent as worries about a possible increase in OPEC oil production weighed on the price of oil, which fell 2.8 per cent to $67.35 a barrel on nervousness about a possible increase in production by OPEC and its allies. Heavily weighted financials also lost 0.9 per cent. Given this, it comes as no surprise that the S&P/TSX composite index fell for a third straight day on Friday last week - its sharpest decline since April 10. For the week, the TSX was down 1.7 per cent. (3)

Major U.S. stock indexes posted losses last week. This was the worst week for some indexes since the tariff-driven sell-off in early April. The Dow Jones Industrial Average was down 2.92 per cent, the S&P 500 Index was down 2.36 per cent and the Nasdaq Composite was down 2.17 per cent. Unsurprisingly, trade deals and tariffs were a major driver of investor sentiment throughout the week leading up to President Donald Trump’s arbitrary August 1 deadline for new deals. On Thursday last week, President Trump signed an executive order to raise tariffs on the vast majority of U.S. trading partners, effective August 7. This appeared to weigh heavily on U.S. stock indexes Friday morning.

Earnings headlines were another major focal point during last week. According to data from FactSet, of the 66 per cent of S&P 500 companies that reported through Friday, 82 per cent have beaten consensus earnings estimates, with a blended earnings growth rate of 10.3 per cent. However, several companies warned that tariff headwinds are weighing on their businesses, including Ford Motor, which said it expects to take a USD 2 billion hit from tariffs this year. The Fed concluded its July monetary policy meeting last week and, as was widely expected, maintained its target policy rate at a range of 4.25 to 4.50 per cent.

Meanwhile, data released by the Bureau of Economic Analysis (BEA) on Thursday showed that inflation rose in June. The BEA’s core personal consumption expenditures (PCE) index—the Fed’s preferred measure of inflation—rose 0.3 per cent month over month in June, accelerating from May’s reading of 0.2 per cent. On a year-over-year basis, prices rose 2.8 per cent, remaining solidly ahead of the Fed’s long-term inflation target of 2 per cent. The BEA also reported that the U.S. economy grew 3 per cent in the second quarter. This is a sharp increase from the first quarter’s 0.5 per cent decline and was largely driven by a steep drop in imports, which subtracts from the BEA’s calculation of gross domestic product (GDP).

Last Friday, the Labor Department reported that the U.S. economy added only 73,000 jobs in July, well below consensus estimates for a gain of around 115,000. According to the CME FedWatch tool, market expectations for a rate cut in September surged in response to this report, rebounding sharply after declining after the Fed meeting on Wednesday.

In local currency terms, the pan-European STOXX Europe 600 Index ended 2.57 per cent lower due to growing disappointment with the framework trade deal between the U.S. and the EU. Other European major stock indexes fell as well. Resilient eurozone data for GDP, inflation, and economic sentiment appeared to reduce pressure on the European Central Bank (ECB) to lower interest rates again. Headline inflation held steady at 2.0 per cent in July, in line with the ECB’s target.

Stock markets in Japan fell last week. The Japanese technology segment was weak, amid some unfavourable earnings developments, and renewed global trade tensions weighed on investor sentiment. As expected, the Bank of Japan (BoJ) left its key interest rate unchanged at 0.5 per cent last week. The BoJ revised its expectations for inflation, forecasting that the core consumer price index (CPI) will increase 2.7 per cent in fiscal 2025, up from the 2.2 per cent forecast in April, due to persistent increases in food prices.

Mainland Chinese stock markets retreated after the new U.S. tariff rates darkened the global growth outlook and a batch of data suggested a slowdown in China’s economy. The S&P Global manufacturing purchasing managers’ index (PMI) for China fell to 49.5 in July, below the 50 level that indicates a contraction, versus June’s 50.4 reading. High temperatures, heavy rain, and flooding in some regions that disrupted manufacturing were the reasons given for this deterioration. (4)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.