The tumultuous early weeks of 2026 are witnessing the U.S. dollar facing a strong sell-off, driven by a growing set of factors that have led investors to reevaluate their optimistic expectations for a period of currency stability. Among these factors is Washington's desire for a weaker currency.
The dollar is currently on track to record its largest decline in three days against a basket of major currencies since last April, when the 'Liberation Day' tariffs imposed by President Donald Trump triggered an almost unprecedented sell-off of U.S. assets.
Multiple vulnerabilities:
Trump's policies during his first year in office - including his erratic approach to trade and international diplomacy, his attacks on the Federal Reserve that undermine its independence, and the massive increases in public spending - led to a 10% decline in the dollar. Its performance still lags behind that of other major currencies like the euro, the British pound, and the Swiss franc.
The pace of change is accelerating:
Sima Shah, global chief strategist at 'Principal Asset Management' (which manages assets exceeding $600 billion), comments: 'There are a number of factors coming together. I don’t think this is a full-blown shift to 'sell American assets,' but the fundamentals are coming together and evolving faster than expected.'
A tense political environment:
January alone witnessed a series of alarming statements and actions: Trump’s threats to take control of Greenland, imposing additional tariffs on European allies regarding this issue, attempting to criminally pursue Federal Reserve Chairman Jerome Powell, overseeing an operation to seize Venezuela's president, and threatening Canada with an actual trade ban on Saturday.
Despite backing away from some threats, the overall backdrop remains charged. Market volatility indicators remain high, while bond market sentiment remains fragile, particularly amid an aggressive wave of selling in Japanese government debt that could spill over into U.S. Treasury bonds. The ongoing rise of gold to new record levels is a signal of investors seeking alternative safe havens.
Domestic and international risks:
Trump's domestic policies, including the crackdown on illegal immigration that has claimed American lives and sparked protests this month, could lead to another government shutdown.
Additionally, the Federal Reserve is still expected to cut interest rates at least twice this year, while other major central banks are either pausing or may raise interest rates. This alone reduces the appeal of the dollar to investors who may prefer assets with increasing yields.
An uncertain future for monetary policy:
Jerome Powell - who resisted Trump’s pressures to cut interest rates faster - will resign in May. Online betting markets now indicate a 50% chance that Rick Rieder of 'BlackRock' - a proponent of interest rate cuts like the president - is the likely successor, compared to less than 10% a week ago, increasing the dollar's vulnerability.
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