COMMENTARY
The U.S. dollar has weakened considerably in recent times, despite stronger economic growth in the United States compared to other developed nations. Over the past year, the dollar has lost nearly 20% of its value against the euro. The Dollar Index remains below 100 points, its lowest level since 2022, with a roughly 12% decline to 96 points over the last year.
Currency market movements are often driven by investor expectations regarding future economic conditions—particularly interest rate direction, as well as political and geopolitical risks—rather than backward-looking GDP figures.
A primary driver of the dollar’s decline is the heightened political uncertainty in the U.S. This environment encourages investors to diversify their holdings outside of USD-denominated assets and seek alternative safe havens. This trend is reflected in the dollar’s underperformance against currencies like the euro and Swiss franc earlier this year, alongside a surge in demand for safe-haven assets such as gold and silver, which have recently hit record highs—a typical response to risk aversion.
Macroeconomic factors are also weighing on the dollar. While the Federal Reserve held interest rates steady at its most recent meeting, the market is focused on future expectations, with a growing consensus that the Fed will begin easing monetary policy at some point in 2026. This shift in expectations is contributing to the dollar’s weakness.
The “Trump Effect,” or an Appetite for a Weaker Dollar
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The dollar’s performance is also linked to the policies of Donald Trump. The market appears to anticipate a benefit from a weaker dollar, viewing it as potentially favorable to his administration. A weaker currency can boost the competitiveness of U.S. exports and benefit companies with significant foreign revenues, although it can also increase import costs and contribute to inflationary pressures.
How do you think the U.S. dollar will perform?
Statements by Trump himself have contributed to this dynamic. This week, he described the dollar’s value as “great,” a comment the market interpreted as a signal that the White House does not object to a weakening currency. This perception could further encourage dollar selling. He also suggested the dollar could move “up and down,” which markets read as adding to the overall uncertainty.
Is the Dollar at Risk of Losing its Status as the World’s Reserve Currency?
The dollar’s weakening may encourage diversification, with some capital flowing into other currencies or gold, but I don’t believe the dollar is realistically at risk of losing its dominant position in the near future. Data from the IMF COFER show gradual shifts rather than a sudden dethroning. For example, in the third quarter of 2023, the dollar accounted for approximately 56.9% of global foreign exchange reserves, while the euro represented around 20.3%.
Outlook: Could EUR/USD Reach Above 1.20?
I believe the dollar has room to weaken further if political uncertainty persists and the market continues to anticipate Fed easing. In that scenario, it’s not unreasonable to expect EUR/USD to test levels above 1.20 this year. However, this will depend on a combination of political developments, macroeconomic data, and investor sentiment.
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