Background on the Dollar’s Current Situation
The Financial Times, an influential British daily, highlighted on its front page that Donald Trump’s policies have forced investors to reduce their exposure in the US dollar as a safe-haven currency.
The US dollar has remained weak in the first half of the year compared to major currencies, aiming for its worst level in three years and the lowest performance in more than half a century due to Trump’s trade policies.
Impact on Investor Strategies
The dollar’s weakness against currencies like the euro, Japanese yen, Swiss franc, Canadian dollar, and Swedish krona has prompted global investors to reconsider their exposure to the world’s dominant currency, as reported by Financial Times.
“The dollar has become the whipping boy of Trump’s erratic policies 2.0,” said Francesco Pesole, ING strategist, as quoted by the newspaper.
Performance of the Dollar Index
The Intercontinental Exchange’s Dollar Index (DXY), which measures the greenback against a basket of six reference currencies, fell 0.23% to 96.66 points on Tuesday. With this result, it has reached its lowest level since February 25, 2022, when it closed at 96.61 units.
Its performance has been disappointing, with a 10.90% decline in the first half of the year, only surpassed by the 15% plunge recorded in 1973, according to FT.
Historical Context and Comparison
This dollar decline represents the worst six months for the currency since the collapse of the Bretton Woods system.
The DXY is a weighted average of the nominal exchange rate of six strong currencies: euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
Compared to stronger currencies, the dollar has lost ground in the first six months of the year. The euro appreciated by 12.31%, the yen advanced by 8.77%, the British pound gained 9.86%, the Canadian dollar rose by 5.11%, the Swiss franc increased by 12.78%, and the Swedish krona surged by 14.23%.
Expert Opinions and Future Outlook
“The dollar has been under pressure during the first half and is expected to continue depreciating in the second,” predict analysts at Wells Fargo in an analysis note.
They added that if the Fed reduces interest rates faster than most of its G-10 peers, “moderating US economic trends and reduced trade tensions should contribute to a weaker dollar in the coming quarters.”
However, they anticipate that the dollar could reverse its course and strengthen by 2026, as monetary policy and growth trends favor the United States.
Experts at Oxford Economics highlighted in a study that the dollar has lost more than 10% of its value against major floating currencies since its January peak.
“Initially, this was part of a coordinated unwinding of US assets. However, the dollar’s weakness persisted even after stocks rallied despite rising bond yields,” they noted.
They pointed out that a weakened currency combined with rising yields is unusual and resembles the pattern one might expect in an emerging market facing difficulties.
“In the current context, the dollar market has shown notable weakness against major currencies. This trend is largely due to anticipation of interest rate cuts, which have been suggested by recent statements from Jerome Powell,” asserted Felipe Mendoza, financial markets analyst at ATFX LATAM.
Key Questions and Answers
- Q: What has caused the US dollar’s recent weakness?
A: The US dollar’s weakness is primarily due to investors reducing their exposure as a safe-haven currency, driven by Donald Trump’s erratic trade policies, anticipation of interest rate cuts by the Federal Reserve, and concerns about the independence of the central bank.
- Q: How have major currencies performed against the US dollar?
A: Major currencies like the euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona have appreciated or gained against the US dollar in the first half of the year.
- Q: What do experts predict for the future of the US dollar?
A: While some experts anticipate continued weakness in the short term, others predict a potential reversal and strengthening of the US dollar by 2026, contingent on favorable monetary policy and growth trends in the United States.
