Analysis-Dollar under fire again as investors reassess Trump policies, geopolitical risk

Authors: Amanda Cooper, Dara Ranasinghe and Samuel Indik

LONDON, Jan 26 (Reuters) – The dollar is under attack again amid the turbulence of the early weeks of 2026, as a growing number of factors, including Washington’s desire for a weaker dollar, prompt investors to rethink optimistic assumptions about a period of dollar stability.

The U.S. dollar posted its biggest three-day decline against a basket of major currencies on Monday since April last year, when U.S. President Donald Trump’s “Liberation Day” tariffs triggered an almost unprecedented sell-off in U.S. assets.

In his first year in office, Trump’s erratic approach to trade and international diplomacy, attacks on the Federal Reserve that undermined its independence, and a massive increase in public spending caused the dollar to lose 10% of its value.

The dollar once again underperformed other major currencies such as the euro, pound and Swiss franc.

whirlwind rate of change

“There are a lot of factors coming together,” said Seema Shah, chief global strategist at Principal Asset Management, which manages assets worth just over $600 billion.

“I don’t think this is a ‘Sell America’ deal, but the fundamentals are converging, and faster than expected.”

Just this month, Trump threatened to take control of Greenland, levied more tariffs on European allies over the matter, filed criminal charges against Federal Reserve Chairman Jerome Powell and oversaw an operation to capture the president of Venezuela. On Saturday, he threatened Canada with an effective trade embargo.

Although he backed down on threats on Greenland and European tariffs and markets shrugged off the blow to Venezuela, the backdrop remains tense.

Gauges of market volatility remain red-hot, bond market sentiment is fragile, especially as a sharp sell-off in Japanese government debt threatens to spill over into U.S. Treasuries, and gold’s steady run of new records suggests investors are seeking alternative safe-haven assets.

Trump’s domestic policies, including a harsh crackdown on illegal immigration that killed two U.S. citizens and sparked protests this month, could prompt another government shutdown this month.

What’s more, the Fed is still expected to cut interest rates at least twice this year, while other major central banks are pausing and possibly even raising rates.

That alone makes the dollar less attractive to investors, who may choose to put their money where lending rates rise.

Powell resigned in May after resisting pressure from Trump to cut interest rates faster. Adding to the dollar’s weakness, online betting markets now see a 50% chance of BlackRock’s Rick Rieder, a presidential-like advocate of lower interest rates, as the likely successor, up from less than 10% a week ago.

It’s time to move on

Meanwhile, global stock markets soared last year, thanks in large part to enthusiasm for artificial intelligence. The S&P 500 has lagged other markets since Trump took office. Since then, the index has gained about 15%, while the Kospi in Seoul is up 95%, Tokyo’s Nikkei is up 40% and Shanghai’s main index is up nearly 30%.

“On the margin, asset managers are keen to continue diversifying outside the U.S.,” said Chris Scicluna, economist at Daiwa Capital Markets. “It’s clear that many are overweight or think they are overweight the U.S. market.”

Trump has repeatedly said tariffs are necessary to address trade imbalances, focusing on the currencies of Asian countries with large trade deficits with the United States.

On Friday, the Bank of Japan and the New York Fed were suspected of conducting a series of interest rate checks on the yen, which may be a precursor to joint Japanese and US intervention in 15 years to boost the yen exchange rate.

Even with the subsequent appreciation of the yen, the yen still fell by about 13% against the US dollar last year.

Trade-weighted dollar strengthens

However, the dollar has fallen only about 5.3% on a trade-weighted basis over the past 12 months, according to an index calculated by the Bank for International Settlements.

Dominic Bunning, head of G10 foreign exchange strategy at Nomura Securities, said investors are increasingly worried about their dollar exposure and that last year’s decline is more attributable to cyclical factors such as slowing economic growth.

“The difference to me (this year) is that the policies being implemented by the United States appear to be more confrontational and geopolitical rather than economic policies of tariffs,” he said.

(Reporting by Amanda Cooper, Samuel Indyk and Dhara Ranasinghe; Editing by Elisa Martinuzzi and Hugh Lawson)