The US dollar faced its steepest weekly decline in over a year, falling 1.6% in the Bloomberg Dollar Spot Index, marking its worst performance since November 2023. This drop occurred as traders reacted to President Donald Trump’s ongoing tariff rhetoric, which has yet to materialize into concrete action.
The dollar’s losses accelerated after Trump appeared to soften his stance on imposing tariffs against China. Although Trump has repeatedly threatened tariffs against key US trading partners like Canada and Mexico, he has not yet signed any executive orders. Instead, the president has ordered the Treasury and Commerce departments to review trade relations and provide recommendations by April 1.
Matthew Hornbach, Morgan Stanley’s head of macro strategy, noted that investors had previously been reluctant to sell off the dollar due to uncertainty surrounding Trump’s trade policies. With less imminent risk of tariff implementation, investors now feel more comfortable acting on their belief that the dollar is overvalued and ripe for correction. Hornbach predicts that this shift will benefit currencies like the Japanese yen, euro, and British pound.
The British pound emerged as the best-performing Group-of-10 currency against the dollar, gaining over 2.5% for the week, buoyed by stronger-than-expected manufacturing and services data from the UK. The euro also posted its best week since 2023, with the bulk of Trump’s tariff threats focused on Canada and Mexico rather than the eurozone.
Goldman Sachs currency strategists estimate that traders have already unwound two-thirds of the tariff risk premium factored into the euro-dollar pair. However, the bank still expects US economic strength and potential trade measures to support the greenback in the coming months.
The recent decline in the dollar may reflect a reduction in speculative long positions rather than a lasting trend, according to MUFG currency analysts Derek Halpenny and Lee Hardman. They remain convinced that Trump will eventually employ tariffs actively, which could alter market sentiment on trade and the dollar in the near future.
Despite the week’s downturn, dollar bullishness remains elevated, with $33.7 billion in long dollar positions recorded by the Commodity Futures Trading Commission as of January 21. This figure is near the highest level since 2019, indicating that the market’s confidence in the dollar has persisted since Trump’s re-election in November 2024.
For now, traders continue to navigate a market driven by speculation, waiting for concrete policy actions to clarify the dollar’s trajectory.
