Dollar slides after volatile period
After a dramatic 2025, when US President Donald Trump’s tariff announcements sent the dollar tumbling, currency traders were expecting a quieter year.
Recent weeks have shattered that complacency.
The dollar dropped to its lowest point in four years on Tuesday against a basket of currencies, hitting multi-year lows against the euro and the pound as it fell 3% in roughly a week.
That slide has since slowed, but analysts say the reprieve is likely to be temporary.
“Most people would think the dollar should, could, and would weaken further this year,” said Chris Turner, global head of financial market research at ING. “The jury’s out on the timing but less so on the direction.”
A weaker dollar reduces purchasing power for Americans – something overseas travellers know all too well. If that trend continues, analysts say it risks fuelling inflation inside the US, as Americans face higher prices for imports.
The falls have also raised broader questions about whether the dollar’s status as the world’s go-to currency – which for decades has helped keep US borrowing costs relatively low – could be under threat.
What has happened to the dollar?
The dollar has been coming off more than a decade of strength, with especially sharp gains between 2020 and 2022, when post-pandemic growth and relatively high interest rates drove investor demand.
Last year, however, the dollar index- which tracks its value against a basket of currencies- dropped almost 10%, its worst performance since 2017. Much of that decline occurred in the weeks following Trump’s “Liberation Day” tariff announcements last spring.
This month, the dollar slid further as tensions grew between the US and Europe over Greenland.
Losses continued this week amid speculation that the US might consider actions that would weaken the dollar further, including selling dollars alongside Japan to support the yen, which has faced its own sell-off.
Why is the dollar falling?
Analysts say the downturn partly reflects market concern over the Trump administration’s policies.
“In my opinion, what markets are reacting to is the haphazard nature of policy in this administration — the escalation, de-escalation,” said Robin Brooks, senior fellow at the Brookings Institution and former FX strategist at Goldman Sachs.
The dollar’s decline, he said, reflects markets signalling that “this kind of chaotic back and forth hurts the US more than anyone else”.
Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie, said the rapid escalation in trade tensions had unsettled investors who had previously overlooked geopolitical risks.
Other contributing factors include increased investment opportunities overseas and, more recently, a sell-off in the Japanese bond market, prompting traders to unwind positions linked to interest rate differences between the yen and the dollar.
Comments from US Treasury Secretary Scott Bessent denying US intervention to support Japan helped stabilise the dollar this week, but uncertainty remains over future policy moves.
Where is the money going?
The shift away from the dollar has fuelled a surge in gold prices, which have doubled over the past year as investors seek lower-risk assets.
While other currencies saw limited benefit from redirected funds last year, signs of change are emerging. The euro and the pound rose sharply against the dollar this month, while eleven of the 19 emerging-market currencies tracked by Oxford Economics gained more than 1%.
Some global investors may also be reducing exposure to the US, with pension funds in Amsterdam and Denmark cutting holdings of US Treasuries.
Turner said markets were still far from a full “sell America” narrative, noting that US equities remain near record highs and government debt markets have stayed relatively stable.
ING nevertheless expects the dollar to fall a further 4% to 5% this year as growth prospects outside the US improve.
Does Trump want a weaker dollar?
For now, the dollar’s decline remains modest enough that the impact on American consumers is likely to amount to “noise”, Brooks said.
Future moves will depend partly on US economic performance and how quickly the central bank cuts interest rates. Trump has pushed for faster rate cuts and is expected to appoint a more sympathetic central bank leader in the coming months.
Lower rates could weaken the dollar further as investors seek higher returns elsewhere — a development the White House may welcome, as a weaker currency can boost US export competitiveness.
“It doesn’t sound good, but you make a hell of a lot more money with a weaker dollar… than you do with a strong dollar,” Trump said in July. This week, he said the currency was “doing great”.
Brooks warned that while a sustained dollar decline could benefit US companies, the gains would be limited if the fall reflects deeper concerns about policy direction.
“If it’s the market rendering a verdict on poor policies,” he said, “that is probably a very important signal.”
Source: BBC News
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