The US dollar has plunged to its lowest levels since early 2022, yet President Donald Trump claims he is not concerned. "No, I think it’s great," Trump told reporters in Iowa on Tuesday when asked about the currency's decline. "Look at the business we’re doing. The dollar is doing great."
The President's remarks exacerbated an already significant currency slide, the largest since the implementation of tariffs last year, sparking fears that his unpredictable policies will drive foreign investors to withdraw capital from the US. Immediately following the statements, the Bloomberg Dollar Spot Index recorded losses of up to 1.2%, as the dollar retreated against all major currencies before stabilizing somewhat in the London market today. This latest drop puts the index on track for its worst month since April.
Currency war
The American President has long accused other countries of pursuing weak currencies to bolster their exports, while Treasury Secretary Scott Bessent has highlighted the distinction between the price of the dollar and its value as a reserve currency. Consequently, these latest comments were viewed as a signal to traders to sell off the American currency.
"Many in the Trump cabinet want a weak dollar to make exports more competitive," said Win Thin, chief economist at the Bank of Nassau. "They are taking a calculated risk. A weak currency can be good, until things spiral out of control." Part of the dollar's decline is attributed to the sudden surge of the Japanese yen since last week, as traders braced for potential intervention by Japanese officials to support their currency.
Uncertainty
The dollar's decline was further intensified by Trump's unpredictable policies, which have unsettled foreign investors and allies: threats to seize Greenland, pressure on the Federal Reserve, tax cuts that widened the deficit, and a leadership style that has led to greater political polarization in the US.
This weakness persists despite rising Treasury yields and expectations that the Fed will temporarily pause interest rate cuts at this week's meeting—both of which would typically be seen as supportive of the currency. Trump has, moreover, expressed his desire for interest rates to be much lower, a factor that would further weigh down the dollar. This situation has pushed investors toward alternative assets, such as gold, which has reached historic highs in what is now termed the "debasing trade." Meanwhile, capital is flowing into emerging-market funds at record rates as the trend of moving away from US positions—a move some describe as "quiet quitting"—gains momentum.
Analyst outlook
"Today's move in the dollar may seem exaggerated, given that interest rate differentials remain in favor of the dollar against many currencies. However, Trump's comments highlight the persistent risks that will continue to affect the currency and encourage investors to seek cover elsewhere," says Tatiana Darie, Macro Strategist at Markets Live. For years, Trump has maintained conflicting views on the dollar, touting its strength for negotiations but also the benefits of a weak dollar for the manufacturing sector.
However, any prolonged dollar weakness could bring risks to the US economy. As Robert Kaplan, Vice Chairman of Goldman Sachs, states: "A weaker dollar boosts exports, but the US has a national debt of 39 trillion on its way to 40 trillion, and at such a level, currency stability likely outweighs export advantages."
Market developments to date
Since Trump's inauguration, the Bloomberg dollar index has retreated by nearly 10%, while traders are betting on further losses. Demand for options benefiting from a weak dollar has reached its highest level since 2011, and expectations for other currencies are at multi-month highs, comparable to those following the tariff announcements in April. Trading volumes remain high: on Tuesday, turnover through the Depository Trust & Clearing hit a historic record.
Finally, analysis based on purchasing power parity shows that the dollar remains overvalued against all Group-of-10 currencies except the Swiss franc, while the yen and the euro appear undervalued, giving an advantage to exporters in Europe and Japan. Trump hinted on Tuesday that he could influence the dollar's strength, saying: "I can move it up or down like a yo-yo." However, he characterized this as a negative outcome, comparing it to hiring unnecessary workers to boost employment figures, while criticizing Asian economies for attempting to devalue their currencies.
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