The Weakening Foundations of U.S. Economic Data and Its Implications for Dollar Strength

The U.S. dollar has long been the cornerstone of global finance, its strength underpinned by the reliability of economic data that informs policy, markets, and investor confidence. However, a troubling erosion of data quality and political interference in statistical processes is now casting a shadow over the dollar's future. As key economic indicators like GDP, CPI, and unemployment figures face scrutiny, investors must reevaluate their assumptions about U.S. economic resilience and Fed policy.

The Erosion of Data Integrity

The U.S. economic data system, once celebrated for its rigor, is now under siege. The Trump administration's dismantling of advisory bodies such as the Federal Economic Statistics Advisory Committee and the Bureau of Economic Analysis's review panel has removed critical checks on data methodology. Commerce Secretary Howard Lutnick's proposal to exclude government spending from GDP calculations—a radical departure from international standards—has further muddled the picture. Such changes risk distorting perceptions of economic health, masking the true impact of fiscal policies and creating a feedback loop of uncertainty.

Compounding these issues are severe underfunding and staffing shortages at agencies like the Bureau of Labor Statistics (BLS). Budget cuts and a federal hiring freeze have forced the BLS to reduce price checks for the CPI and eliminate wholesale price monitoring in 34 industries. The result? A growing reliance on estimates and extrapolations, which erode the accuracy of data used to adjust Social Security payments, guide Fed decisions, and shape corporate strategies.

Political Pressures and Perceived Bias

While direct evidence of data tampering remains absent, the administration's rhetoric and structural changes have fostered a climate of skepticism. Former BLS commissioner Erica Groshen has warned that these moves undermine the “continuous improvement process” vital to statistical integrity. Meanwhile, Trump's history of dismissing unfavorable economic reports—such as his claims of a “tremendous economy” despite rising unemployment—has amplified fears of politicization. This perception alone can destabilize markets, as investors question the reliability of the data they rely on.

Implications for the Dollar and Fed Policy

The Fed's ability to navigate the dual mandate of price stability and full employment hinges on trustworthy data. Yet, distorted readings from CPI and GDP metrics have forced the central bank into a reactive stance. For example, the 3.6% year-over-year core PCE inflation rate in late 2025—a figure inflated by tariff-driven price spikes—has kept the Fed hesitant to cut rates, even as underlying growth slows. This delay has contributed to the dollar's worst first-half performance since 1986, with the dollar index falling to 97.26 by June 2025.

The bond market has mirrored this uncertainty. Fears of fiscal instability, exacerbated by a ballooning deficit and prolonged high tariffs, pushed 10-year Treasury yields to 4.5% by late 2025. Investors are now demanding higher compensation for U.S. debt risk, a trend that could further weaken the dollar if it persists.

Investor Strategy: Navigating a Shifting Landscape

Given these challenges, investors must adopt a defensive posture while hedging against policy surprises. Here's how:

1. Diversify Exposure to Dollar-Linked Assets
   The dollar's volatility underscores the need to reduce overreliance on U.S.-centric portfolios. Consider overweighting non-dollar currencies like the euro or yen, particularly if the Fed delays rate cuts. Emerging markets, while risky, may offer higher yields if the Fed's dovish pivot materializes.

2. Hedge Against Inflation and Policy Uncertainty
   With CPI data increasingly unreliable, inflation-linked assets like TIPS (Treasury Inflation-Protected Securities) and commodities (e.g., gold, copper) become critical. These act as a buffer against both actual inflation and the Fed's potential misjudgments.

3. Monitor Non-Government Data Sources
   As trust in official statistics wanes, private-sector indicators—such as the Conference Board's Consumer Confidence Index or regional Fed manufacturing surveys—could provide clearer signals. Investors should prioritize these when assessing economic momentum.

4. Position for a Prolonged Policy Tightening Cycle
   The Fed's cautious approach suggests rates may remain elevated through 2026. This favors short-duration bonds and cash equivalents, while long-duration assets (e.g., equities in growth sectors) face higher discount rates.

5. Defensive Sectors in a Volatile Climate
   Sectors less sensitive to interest rates—such as utilities, consumer staples, and healthcare—offer stability amid uncertainty. Conversely, high-beta sectors like technology and industrials may underperform if growth disappoints.

The Road Ahead

The Fed's next policy decision, expected in September 2025, will test its ability to balance inflation control with growth support. However, the integrity of its data inputs remains the wild card. If political pressures continue to erode data quality, the Fed's credibility—and by extension, the dollar's strength—will face further strain.

Investors must remain vigilant, treating U.S. economic data with a critical eye while diversifying their portfolios to withstand a range of outcomes. In an era of declining data reliability, adaptability is the key to preserving capital and capturing opportunities in an increasingly unpredictable global economy.

Final Note: The foundation of the dollar's strength lies not just in its intrinsic value but in the trust it inspires. As that trust erodes, so too does the dollar's dominance. Investors who act now to hedge against this shift may find themselves better positioned to thrive in the years ahead.