Dollar Under Pressure in Early 2026: How Trump Policies Are Shaking Global Markets

Context: Key Development

• The U.S. dollar faced renewed weakness in the first weeks of 2026, registering its biggest three-day slide against major currencies since April 2025 (triggered by initial “Liberation Day” tariffs).
• Investors are reassessing earlier optimism about dollar stability, driven by a combination of Trump administration policies, geopolitical volatility, expectations of Fed rate cuts, and global diversification trends.

Current Performance

• Dollar weakened notably against euro, sterling, and Swiss franc in early 2026.
• On a trade-weighted basis (BIS index), the decline is milder (~5.3% over the last 12 months), reflecting resilience in trade-partner currencies.
• Contrast: Broader global equities (especially Asia) outperformed U.S. markets post-Trump inauguration (e.g., Kospi +95%, Nikkei +40%, Shanghai +~30% vs. S&P 500 +15%).

Main Drivers of Dollar Weakness

• Trump’s Policy & Diplomatic Approach
  • Erratic trade threats (e.g., tariffs on European allies over Greenland, effective trade embargo threats on Canada).
  • Aggressive foreign policy moves (e.g., operation to seize Venezuelan president, threats over Greenland).
  • Attacks on Federal Reserve independence and calls for faster rate cuts.
  • Huge public spending increases and domestic crackdowns (e.g., immigration enforcement leading to protests and shutdown risks).
  • These factors create policy uncertainty and erode investor confidence in U.S. assets.
• Federal Reserve Expectations
  • Markets anticipate at least two rate cuts in 2026, reducing dollar carry-trade appeal.
  • Other major central banks (e.g., ECB, BoE) are pausing or potentially hiking rates → widens interest rate differentials against the dollar.
  • Fed Chair Jerome Powell steps down in May 2026; betting markets now give ~50% chance to a lower-rate advocate (e.g., BlackRock’s Rick Rieder) succeeding him (up sharply from <10% a week earlier).
• Geopolitical & Safe-Haven Shifts
  • Heightened global tensions → investors seeking alternatives (gold hitting record highs, fragile bond sentiment, JGB selloff risks spilling to Treasuries).
  • U.S. economic policy uncertainty index rising.
• Tariff & Currency Focus
  • Trump emphasizes tariffs to correct trade imbalances (targeting Asian currencies with large U.S. deficits).
  • Suspected joint BoJ–NY Fed intervention signals (yen rate checks) to support Japanese currency (yen still down ~13% vs. dollar over past year).

Investor & Market Sentiment

• Shift toward diversification away from U.S. assets — many global funds were previously overweight U.S. markets and are now reducing exposure at the margin.
• Not a full “Sell America” trade, but fundamentals deteriorating faster than expected (per Principal Asset Management).
• Dollar weakness seen as partly self-inflicted (antagonistic geopolitical policies vs. purely cyclical/economic factors in prior periods).

Implications

• For U.S.: Weaker dollar could support exports but risks imported inflation, higher borrowing costs if bond selloff intensifies, and reduced global safe-haven status.
• For Global Economy: Increased volatility in FX, bonds, and equities; potential spillover from U.S. policy unpredictability.
• For Emerging Markets/India: Mixed — cheaper dollar aids exporters and reduces import costs (e.g., oil), but global risk-off sentiment and higher volatility can trigger FPI outflows (as seen in 2025 rupee pressures).
• Gold’s rally and yen dynamics highlight search for non-dollar safe havens.

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