Short term: The decline of the US dollar
Leading up to the US elections on 5 November 2024, and in the immediate aftermath, the USD experienced a renewed bout of strength. Markets had anticipated that President-elect Donald Trump would extend the exceptional performance of US assets through pro-growth policies such as deregulation, government efficiency, and further corporate tax cuts. However, this optimism began to unravel as increasingly confrontational trade policies targeting key trading partners became evident. The erratic nature of these policies culminated on Trump’s so-called ‘Liberation Day’ (2 April), when the administration announced punitive reciprocal tariffs. This shock triggered a sharp USD sell-off, with the currency weakening by more than 10%.
Negative USD sentiment had been spreading in markets, with investors questioning its safe-haven character. This shift emerged particularly after the currency decoupled from US interest rates in the wake of the Liberation Day shock. Further developments, such as the passing of the ‘One Big Beautiful Bill Act’ (OBBBA), cementing high budget deficits and an unsustainable debt trajectory, couple with constant pressure on the US Federal Reserve to lower interest rates, have further undermined investors’ confidence in the USD.
However, the weakening of the USD also reflects cyclical factors, including market concerns that protectionist trade policies could heighten the risk of US stagflation. With the subsequent emergence of new trade deals, the worst-case tariff scenarios did not unfold, restoring some of the lost confidence in the USD. Since summer 2025, the USD has been trading largely sideways. A key driver of this consolidation was outstanding performance in the artificial intelligence (AI) sector, which attracted investment inflows that helped stabilise the currency.
Challenges to the safe-haven status
In early 2025, the USD did not appreciate when financial markets became volatile, causing doubts about its safe-haven characteristics. However, looking back at history, the USD tends to act as a safe haven rather in times of slowing global growth or global recessions. It is not uncommon for the USD to weaken when the US is the epicentre of increased uncertainty. A good example of this is the 2008 financial crisis, which started in the US. Initially, the USD lost value, but as the crisis spread globally, it eventually strengthened, showing its safe-haven qualities. So, while the USD may not always behave like a safe haven, it tends to do so when the global economy is under stress. Given that the ‘tariff shock’ from Donald Trump’s Liberation Day posed a greater risk to the US economy than to other countries, the subsequent weakening of the USD should, in hindsight, not have been surprising.
Medium term: More weakness ahead
So far, the depreciation has reduced some of the USD’s previous overvaluation. However, the currency is now simply less overvalued, suggesting there is still room for depreciation. We think that further depreciation is possible for the following reasons:
1. Structural outflows
The US’s twin deficit, meaning that the US runs both a budget and a trade deficit, makes the USD vulnerable because it relies on foreign investment to offset money flowing out. If inflows slow, the USD faces more pressure to weaken. The popularity of the AI boom that favours certain US assets is key to this mechanism. Nevertheless, as the Federal Reserve lowers interest rates and narrows the still-favourable interest rate differential between the USD and peer currencies, the ability to attract inflows recedes, ultimately causing the currency to weaken. Any doubts regarding the superiority of US asset returns would expediate this process.
2. Lingering fiscal risks
Although the OBBBA was highly debated in markets before its enactment, it vanished from investors’ minds after passing Congress. Nevertheless, the bill cements the tight fiscal situation with high budget deficits for years to come. With tariff income not sufficient to balance the budget deficit, the fiscal stance of the US continues to look vulnerable and could once again come into the spotlight. Should US Treasuries again become less popular to hold, less inflows would consequently lead to a weaker USD.
3. Risk of erratic policymaking remains
Although tensions have eased on the trade front, and US policymaking may turn more economy-friendly ahead of the 2026 midterm elections, there remains a persistent risk that erratic policymaking could resurface. The Supreme Court has yet to rule on whether Trump’s tariffs were lawful under the International Economic Emergency Powers Act. If they are deemed illegal, other leeways could be sought to reimpose the tariffs, while the lack of tariff income would accentuate the fiscal vulnerabilities of the US. Furthermore, ongoing pressure on the Federal Reserve to cut interest rates raises concerns about the independence of US monetary policy. There are ample risks capable of increasing distrust in US assets, particularly US Treasuries, potentially triggering less inflows, a weaker USD, and, in turn, renewed challenges to the USD’s safe-haven status.
Key risk: Political motivation for depreciation
A desire by the US administration for a weaker USD has been highly debated since President Trump’s inauguration. The debate about a so-called ‘Mar-a-Lago’ agreement to engineer a weaker USD, similar to the 1985 Plaza Accord, in order to reduce trade imbalances, has, however, calmed down. Aside from mounting pressure on the Federal Reserve to lower interest rates, no policies have become visible aimed at deliberately depreciating the USD. Previously floated financial repression measures or an abolition of Federal Reserve independence have not emerged. This follows the logic that the administration also benefits from the privilege of the USD’s role as a reserve currency, using it as a foreign policy tool. Ultimately, the weakening in 2025 came rather as a welcomed side effect of (erratic) policymaking, rather than the outcome of deliberate depreciation or even debasement policies.
Long term: A positive risk scenario
There is still a good chance that erratic policymaking recedes in light of the 2026 midterm elections, or simply as a result of efforts to correct the economic damage caused by tariffs. In such a case, confidence in US assets could return, supporting sustained inflows and allowing the USD to regain ground. In fact, the US is still expected to expand faster and offer higher interest rates than most of its peer economies in 2026. A shift in focus – from asset returns driven by institutional credibility towards those shaped by growth and interest rate differentials – would improve the outlook for the USD. In such a scenario, the USD could follow a similar path to that of the first Trump presidency: depreciating by roughly 10% in the first year of the term, due to the unfolding trade war with China, but beginning to recover with the shift to growth-friendlier policies ahead of the midterm elections.
Frequently asked questions
Why has the USD weakened since 2022?
Anticipation of Federal Reserve interest rate cuts caused the USD to peak and start to weaken, followed by rapid depreciation in early 2025 due to erratic trade policies that undermined trust in US assets and ultimately in the currency’s safe-haven character.
Is the USD losing its safe-haven character?
The safe-haven status is under scrutiny but not defeated. The USD’s safe-haven role tends to emerge during global recessions or widespread economic stress, not when uncertainty originates in the US.
Could political decisions further weaken the USD?
Yes, political decisions that create economic uncertainty or even undermine institutional stability could erode trust in the USD and contribute to further depreciation.
Is deliberate depreciation by the US government likely?
Deliberate depreciation is unlikely because it would threaten the USD’s role as the global reserve currency, although a weaker USD is politically desirable for reducing trade imbalances.
What could strengthen the USD again?
The USD could strengthen if policymaking stabilises and growth-friendly measures ahead of the 2026 midterm elections restore investor confidence, maintaining inflows into US assets.