The dollar has seen a significant drop against the euro and other major currencies since the start of the year. This trend, which seems to be ongoing, appears to be influenced by an uncertain geopolitical landscape and economic decisions tied to the Trump administration. The question remains: how far can this decline go?
Simply put
- Since January, the dollar has lost over 9% against the euro, indicating a rapid shift.
- Donald Trump’s trade policies have led to a notable decrease in confidence.
- Investors are distancing themselves from American assets, resulting in increased pressure on the currency.
- Several major banks predict the euro will surpass $1.20 by the end of 2025.
The US dollar lost momentum in the market
The dollar’s striking decline is largely attributed to the challenges faced by the Trump administration. Recently, the Organization for Economic Cooperation and Development (OECD) downgraded the US growth forecast for 2025 to 1.6%, down from 2.2% the previous year. This adjustment echoes the consequences of tariffs introduced by Trump.
According to the OECD, “New tariffs might encourage more domestic production, but the rising cost of imports could diminish real consumer income.”
Economic paradoxes described by international organizations suggest that these tariffs—intended to protect the US economy—could be detrimental in the long run.
Trump’s unpredictable trade approaches create significant uncertainty. By using tariffs as a bargaining tool, he not only antagonizes trading partners but also erodes international investor confidence. This political instability prompts capital to seek refuge elsewhere.
The much-discussed budget plan from Trump, often referred to as the “big, beautiful bill,” complicates matters further. Goldman Sachs has warned that this could lead to a long-standing budget deficit and widen the current account gap in the US—creating a volatile mix that threatens the dollar’s credibility.
For a long time, the dollar has weakened!
Bank of America points out a key trend: in recent weeks, global investors have been reevaluating their exposure to the dollar. This movement reflects a “portfolio rotation,” with capital moving away from US assets towards European options.
The situation demonstrates a peculiar contradiction. Since April, while US Treasury yields rose from 4% to 4.6%, the dollar itself depreciated by 5%. Generally, rising rates bolster a currency—but here, we’re witnessing the opposite.
Deutsche Bank had warned of a “crisis of confidence” regarding the US currency back in April, and it seems that damage has indeed occurred.
Trump’s threats to Federal Reserve Chair Jerome Powell add yet another layer of uncertainty. UBS indicates that discussions surrounding the Fed’s independence have become a substantial risk.
This crisis of confidence transcends mere economics. It raises fundamental questions about American dominance, with expectations shifting towards a multipolar world where the dollar may no longer be the standard. This could end up being a self-fulfilling prophecy.
Heading towards the euro for $1.25?
Major banks share a consensus that the euro will likely strengthen further. Morgan Stanley projects it will reach $1.25 by 2026, up from 1.14. Likewise, Deutsche Bank expects it to hit $1.20 at the end of 2025, with a potential rise to $1.25 by December 2026. Nomura anticipates it will reach $1.20 by year’s end.
This alignment suggests significant structural shifts. Europe is moving towards increased budgeting, with Germany easing its debt limits to bolster defense spending. In contrast, the eurozone shows over 1% growth, while the US faces a deteriorating outlook.
Bank of America suggests that any short-term gains for the dollar should be viewed as an opportunity to sell. The sentiment has shifted: dollars are seen less as protective assets and more as offerings on the market.
Monetary policies only reinforce this trend. The Fed remains cautious about cutting rates while inflation persists, whereas the European Central Bank has more flexibility. This financial disparity makes the euro increasingly attractive.
Global financial earthquake crisis
The dollar has lost its former status. This decline, driven by sometimes poorly calibrated political choices, may evolve into a broader structural trend.
As Voltaire noted, “Paper currency founded solely on government trust will inevitably revert to its intrinsic value. In simpler terms, zero.” His perspective feels particularly pertinent today.
Dedollarization is transitioning from a mere geopolitical idea to an active movement. Notably, this doesn’t necessarily mean that any traditional currency, whether that’s the euro or another fiat, will seamlessly take the dollar’s place.
In this increasingly unstable financial environment, it might be worth exploring alternatives. Bitcoin, for example, is becoming a potential safe haven; it could serve as a store of value if the financial system stumbles further—something that seems increasingly likely.
