In a recent report, The Economist noted that the U.S. dollar is undergoing an unprecedented phase of weakness, driven by a series of policies and stances adopted by President Donald Trump following his return to the White House.
اضافة اعلان
While U.S. financial markets have shown a notable ability to adapt to the current volatility, indicators of financial depth suggest that the dollar's status as a safe haven is no longer as secure as it once was.
Since Trump’s inauguration, repeated economic shocks have dulled investor responses. Even decisions that would typically trigger panic—such as imposing a 50% tariff on copper and a 30% tariff on EU imports—are now met with relative indifference.
However, there have been a few exceptions. On July 16, Trump hinted at the possibility of dismissing Federal Reserve Chair Jerome Powell, which caused temporary market turbulence—bond yields spiked and the dollar fell—before markets quickly rebounded, with U.S. indices even hitting new record highs the following day.
Still, what The Economist describes as “surface-level stability” masks growing unease among investors.
The report indicates that the dollar has declined by roughly 10% against a basket of major currencies since Trump took office—contrary to Treasury Secretary Scott Besant’s earlier prediction that protectionist policies would strengthen the dollar by reducing demand for foreign currencies to finance imports.
Interest Rates Fail to Rescue the Dollar
One of the key explanations for this decline, according to The Economist, lies in the breakdown of the traditional relationship between interest rates and currency value.
In April, this relationship temporarily collapsed, with rising U.S. bond yields coinciding with a drop in the dollar—an unusual phenomenon in developed economies, though not uncommon in emerging markets. The report likened this pattern to the U.K. bond crisis under Liz Truss in 2022.
Even though the interest rate–dollar link has since normalized, the U.S. currency has not regained its lost value—reflecting what The Economist sees as lasting damage to the dollar’s global standing.
The dollar's trajectory, the report explains, is now shaped not only by interest rates but also by structural factors such as relative economic growth and confidence in U.S. fiscal policy—both of which are under question amid Trump's unpredictable decisions.
The Erosion of "Safe Haven" Status
One of the pillars of the dollar’s strength has long been its status as a safe haven in times of global financial turmoil. Investors traditionally flock to U.S. assets during periods of heightened risk.
But that trend broke down in April when the VIX—the "fear index" measuring market volatility—spiked at the same time the dollar declined, marking a reversal in investor behavior toward the currency.
In this context, The Economist cites Stephen Kamin from the American Enterprise Institute, who proposed using the correlation between the VIX and the dollar (adjusted for other variables like interest rates) as an indicator of "dollar fragility."
According to this metric, the dollar's vulnerability has been increasing since what Trump called “Liberation Day”—his inauguration—and worsened in the weeks that followed, before stabilizing somewhat over the past month.
Testing the Dollar’s Resilience
The report stresses that while the damage to the dollar is still present, it hasn’t deepened in recent weeks. Still, the threat of a new crisis looms—especially if Trump proceeds with his new tariff threats set to take effect on August 1, which could return U.S. trade duties to the alarming levels seen in April.
The Economist also warns that the independence of the Federal Reserve remains under threat due to growing political pressure from the White House, further unsettling markets over the consistency of U.S. monetary policy.
The report concludes that markets have grown accustomed to the “daily chaos in the White House” but remain aware that any further misstep could spark a fresh storm in the currency and bond markets.
In its closing statement, The Economist asserts:
“The U.S. dollar has not fallen yet, but it has taken undeniable blows to its image as an untouchable currency.”
And it ends with a stark note:
“Given the turmoil that has marked 2025, dollar watchers are unlikely to wait long for the next opportunity to test the currency’s resilience.”
— (Al Jazeera)
