In just one week, the US dollar has undergone a dramatic transformation from a safe haven to a point of vulnerability for investors. US President Donald Trump’s tariffs on both friend and foe were a major blow. These chaotic actions have undermined decades of confidence in the US dollar as the global reserve currency. These changes in trade policy have been a major factor in the impact on global financial markets.
Nowhere has the loss of confidence in the dollar been more evident than in the US Treasury bond market. US borrowing costs reportedly saw their largest weekly increase since 1982. This was a sign of an exodus of foreign funds that had previously relied on the US dollar as a safe haven. As a result, the dollar hit a decade-low against the Swiss franc, and its value against the euro fell to its weakest level in more than three years.
Challenges for the US Dollar
“It seems that the US has lost its safe haven status overnight,” says Ray Attrill, head of foreign exchange strategy at National Australia Bank. He added that these changes in confidence were the result of President Trump’s hasty trade decisions.
The US dollar has gone through periods of challenges before, but this time is different. After the decline of the Bretton Woods system in the 1970s, the dollar remained dominant in currency markets. In 1944, the Bretton Woods Agreements cemented the dollar’s status as a reserve currency, leading the world to place confidence in the US dollar for decades. However, Trump’s recent actions on trade have posed an unprecedented challenge to this status. He imposed significant tariffs on several countries, then abruptly reversed some of his decisions, raising questions about the US administration’s credibility.
Implications of Tariffs on Global Markets
Amid these changes, global markets have witnessed a sharp decline in stock market value, with trillions of dollars wiped off their market value. Global markets have entered a state of turmoil, significantly impacting America’s economic strength. Richard Yetsenga, chief economist said in a note: “The US’s international reputation has been eroded.” He added: “The global economy is in a more fragile position than ever following the imposition of tariffs.”
In addition, Martin Whitton, head of financial markets strategy at Westpac Bank, explained that the wide spreads in US dollar swap rates, the sudden drop in US Treasury yields, and the massive selling of the US currency have demonstrated a “deterioration in liquidity and safety.” Countries that previously relied on the dollar as a reserve currency are now more cautious. It is worth noting that the situation has reached a point where the US is now forced to pay investors more to borrow money than countries like Italy, Spain, or Greece.
Analyzing the Outlook for the US Dollar
Despite these circumstances, some believe that the dollar’s decline may be temporary. According to Francis Tan, chief Asia strategist at Indosuez Wealth Management, “Once the uncertainty subsides, we will see the dollar regain its strength.” Tan adds that tariffs could become “new normal” in the future, meaning the dollar could return to its former status in the near future.
But even if the decline is temporary, any erosion of the dollar’s safe-haven status is bad news for investors. For decades, dollar has been the preferred choice for international investors. For those who have trillions of dollars invested in booming US markets, a sharp decline in the dollar’s value could lead to higher interest rates for a longer period. This will increase price pressures at home, negatively impacting bonds and stocks.
The Dollar vs. Other Currencies
Currently, concerns are growing about the future of the US dollar as a reserve currency. While everyone is talking about the dollar’s decline and loss of its status in global markets, foreign exchange traders appear to have become more bearish on the US currency. Forex traders are the most bearish on the US dollar in five years. This is understandable, as the divergence between the price and futures in currency markets is an indicator of the nearness of a top or bottom. However, on the other hand, this divergence could also be a warning sign that the markets may be on the verge of a correction.
Will the Dollar Recover?
Despite these negative expectations, there are still some reasons why the US dollar could recover in the short term. Positive signals in the trade negotiations with China could help ease tensions between the world’s two largest economies. If the situation calms down, this could diminish expectations of interest rate cuts, which could boost the value of dollar in financial markets. At same time, the possibility of the Federal Reserve deciding to raise interest rates cannot be ruled out, which would have a positive impact on the US dollar. US Dollar Index Forecast
Technical analysis indicates that the US Dollar Index (DXY), which measures the performance of the US currency against a basket of six major currencies, continues to decline. The dollar index is currently trading at 100.40, reflecting a continued downward trend. Despite the downward pressure, there are some indicators that suggest an upward correction could occur soon.
On the downside, the dollar is expected to face support at the psychological level of 100.00, followed by 99.76, index’s lowest level since April 2022. On the upside, a move towards the nine-day exponential moving average could contribute to strengthening upward momentum.
The dollar has a chance of recovery if markets stabilize.
The outlook for the US dollar appears complex. Currently, the dollar is showing significant weakness due to the chaotic trade policies pursued by US President Donald Trump. These policies have eroded confidence in the dollar as a safe haven and affected its status as a reserve currency. However, there is still room for the dollar to recover if markets stabilize and economic prospects return to a more stable outlook. Investors will need to monitor developments closely. Volatility in financial markets may continue to affect the dollar, but ultimately, it is the world’s major economic and political forces that will determine the future of this strategic currency.
