The US dollar is coming under fire again in the first few turbulent weeks of 2026 as a growing range of factors — including Washington’s desire for a weaker currency — prompts a rethink of investors’ optimistic assumptions for a period of stability for the greenback.
The dollar on Monday was headed for its biggest three-day slide against a basket of major currencies since last April, when President Donald Trump’s “Liberation Day” tariffs unleashed a steep selloff in US assets.
In his first year in office, Trump’s erratic approach to trade and international diplomacy, his attacks on the Federal Reserve that undermine its independence, and huge increases in public spending pushed the dollar down more than 9%, its worst yearly showing since 2017.
So far this year, the dollar has again been underperforming other major currencies, including the euro, sterling and Swiss franc.
“There are a number of factors coming together,” said Seema Shah, chief global strategist at Principal Asset Management, which manages just over $600bn (R9.6-trillion) worth of assets.
“I don’t think this is a ‘Sell America’ trade, but the fundamentals are coming together, and faster than expected.”
Just this month, Trump has threatened to take control of Greenland and slap more tariffs on European allies over the matter and moved to criminally indict Fed chair Jerome Powell and overseen an operation to seize the president of Venezuela. On Saturday, he threatened Canada with an effective trade embargo.
While he has backed down on his threats over Greenland and European tariffs, and markets have shaken off the strike on Venezuela, the backdrop is tense.
Market measures of volatility are still running hot, and bond market sentiment is fragile, not least because of an aggressive selloff in Japanese government debt that could spill over into Treasuries, while gold’s relentless scaling of new records is a sign investors are seeking alternative safe havens.
Trump’s domestic policies, including an aggressive crackdown on illegal immigration that has killed two US citizens this month and sparked protests, could prompt another government shutdown this month.
“That threat of a shutdown adds to the tailwind that has been depressing the dollar and adds one more reason for anyone who may be reconsidering investing in US or hedging dollar exposures,” said Mark Spindel, chief investment officer of Potomac River Capital in Washington.
What’s more, the Fed is still expected to cut interest rates at least twice this year, while other major central banks are pausing or could even hike rates.
This alone makes the dollar less appealing to investors, who could opt to put their money somewhere where lending rates are rising.
Powell, who has resisted pressure from Trump for faster rate cuts, steps down in May. Online betting markets now attach a 50% chance to BlackRock’s bond chief, Rick Rieder, an advocate of lower rates like the president, being the probable successor. That was up from less than 10% a week ago, adding to dollar weakness.
Global equities, meanwhile, roared higher last year, thanks in large part to enthusiasm over artificial intelligence. The performance of the S&P 500 since Trump’s inauguration has lagged that of other markets. The index has risen by about 15% since then, compared with a 95% surge in Seoul’s Kospi index, a 40% rise in Tokyo’s Nikkei and a near 30% gain in Shanghai’s main index.
“At the margin, asset managers are keen to continue to diversify away from the US. It’s clear that many had been excessively, or felt they were excessively, overweight in US markets,” Chris Scicluna, Daiwa Capital Markets economist, said.
Trump has repeatedly said tariffs are necessary to address trade imbalances, with a focus on currencies of Asian countries with which the US has large trade deficits.
On Friday the Bank of Japan, together with the New York Fed, was suspected of making a series of rate checks for the yen, a possible precursor to the first bout of joint Japanese-US intervention in 15 years to boost the Japanese currency. The NY Fed acted as a fiscal agent for the US Treasury, according to a source familiar with the matter.
Even with the subsequent yen surge, the Japanese currency is still down about 13% against the dollar in the last year.
On a trade-weighted basis, however, the dollar has only lost about 5.3% in the past 12 months, based on an index calculated by the Bank for International Settlements.
Investors are becoming more concerned about their dollar exposure, with last year’s decline more down to cyclical factors such as growth moderating, said Nomura’s head of G10 FX strategy, Dominic Bunning.
“The difference to me [this year] is that the policies the US is seemingly putting in place are much more antagonistic and geopolitical as opposed to economic with tariffs,” he said.
Reuters
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