The US dollar is projected to decline as trade tensions, policy uncertainty, and slowing GDP growth affect confidence and demand for US assets.

Estimates indicate a 10% drop against the euro and 9% declines versus the yen and pound in 2025. Tariffs might affect US firms’ profit margins and consumer incomes, impacting the dollar’s value.

Foreign Investor Confidence

Consumer boycotts and reduced tourism further strain GDP. Strong foreign spending and weaker US performance have prompted movement out of US assets.

Foreign central banks are decreasing their dollar holdings, with potential for private investors to follow. Tariffs are predicted to economically burden the US if supply chains and consumers remain inflexible.

A suggested 10% universal tariff isn’t certain but remains a possibility amid ongoing trade issues. These dynamics offer new scenarios compared to the previous administration.

What we’ve seen here is a clear picture of strain developing on the currency—pressure that can no longer be dismissed as temporary or isolated. The US dollar, under current policy pressures, appears to be weakening as confidence erodes. Global investors are closely monitoring tariff announcements, shifting macroeconomic data, and central bank behaviour as keys to near-term foreign exchange movements.

A projected 10% slide against the euro, alongside similar drops against the yen and pound, reveals more than fluctuations in perception—it’s sentiment recalibrating based on reduced growth potential and widening imbalances. Simply put, if trade barriers continue to strain supply chains and suppress disposable incomes, then currency weakness is a reflection of those inefficiencies being priced in. For us, expecting noise in rates and divergences in spreads seems not only reasonable, but necessary.

Once large-scale capital retrenchment begins, it’s rare for it to stop halfway. Wang’s observations regarding fewer reserves held in dollars by foreign central banks is likely a harbinger, not an anomaly. History tells us that private capital often mirrors those moves slightly delayed. There’s a psychological anchoring that breaks only when sustained losses make hesitation costlier than action. That’s why any bouts of dollar strength at this stage should be seen as corrective, not durable, unless we see a systemic policy reversal or growth upside—which isn’t being forecasted.

From a positioning perspective, any instruments pegged or heavily reliant on USD performance should now be stress-tested against forward estimates, not backward returns. While a 10% universal tariff might not be enacted imminently, the fact that it rises as a plausible policy option creates enough of a drag to reshape speculative pricing. Predictability in trade has been replaced by rolling negotiations, and that alone keeps volatility on the menu.

Changing Market Dynamics

Markets under the prior administration had different assumptions baked in, particularly around deregulation and capital repatriation. That no longer seems to be the case, which materially changes how risk is distributed across currency pairs. With lower real yields and a decelerating growth base, asset flow dynamics are shifting toward markets perceived as more stable or offering greater return per unit of volatility. That’s what Xu pointed to, and recent portfolio reallocations support the shift.

In the near term, cleaner price action may appear briefly—but reduced liquidity in certain pairings, particularly high-beta ones, could introduce slippage risks that aren’t visible in headline volumes. Tighter stops and staggered entries might help manage exposure here. Gujar’s price targets could now come in sooner than expected, particularly as trade decisions roll forward without an offsetting domestic stimulus on the horizon.

In recent weeks, we’ve noted that even G10 currencies are beginning to show stress behaviours usually reserved for emerging markets. This suggests a recalibration of correlation is underway. Kelly’s models make clear that volatility isn’t responding strictly to data prints, but to policy tone and investor intent, which explains the recent dislocation between rate probabilities and actual FX movement.

So far, margin compression across industrials hasn’t fully hit equity valuations, but pressure is bubbling just under. That’s a signal warranting closer inspection for anyone using synthetic positions tied to currency hedges. The longer sentiment remains tethered to protectionist rhetoric, the more momentum builds against dollar-linked exposures.

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