- The US dollar is near a five-month low amid Trump’s economic and trade policies.
- The euro and yen are rising due to Europe’s spending plans and Japan’s interest rate signals.
- Analysts are speculating on the dollar’s reserve status amid global economic shifts and policies.
The US dollar neared a five-month low against other major currencies on Wednesday after President Donald Trump’s economic and trade policies drove another wild day in the markets.
The US Dollar Index, which measures the greenback against a basket of six major currencies, was 0.3% lower at 103.56 at 4:33 a.m. ET on Wednesday. On Tuesday, the index hit a low not seen since October 16. It’s down 5% since January 20, when Trump took office.
The dollar’s weakness amid the ongoing stock market rout has led to speculation that the greenback is “losing its haven status permanently, as the US relinquishes its traditional role in guaranteeing global security,” wrote Thierry Wizman, a global foreign exchange and rates strategist at Macquarie, on Wednesday.
But much of the dollar’s decline in the past week is due to a rise in the euro after Germany and Europe’s plans for massive defense and government spending, Wizman added.
This development — as well as the potential end of the war in Ukraine — has sent the euro up. On Wednesday, the currency hovered close to a five-month peak against the dollar.
Meanwhile, the Japanese yen — long a haven currency — has also gained about 5% against the dollar since Trump’s inauguration, in part due to the Bank of Japan’s signal to raise interest rates.
Trump has said he wants to see a weaker dollar, which he thinks would help exports. He has also pledged to keep the greenback the world’s dominant currency and threatened a 100% tariff on countries that give up the dollar.
Global shifts are affecting the dollar
While developments outside the US have pushed major currencies higher, the greenback’s weakness is unusual. The haven currency typically gains in uncertain market conditions.
“We are not ready to say that the USD has lost its reserve currency status significantly, but the risk is certainly tilted toward that proposition,” wrote Wizman.
Wizman isn’t the only analyst raising the prospect recently as Trump’s America First policy reverberates across the world.
The policy is causing knock-on effects on other economies including Europe and China. They are ramping up policy stimulus to support growth, which would make assets in these regions more attractive, particularly if the US slips into a recession.
On Monday, Nomura analysts wrote that foreign investors may exit American assets if the US enters a recession. Some foreign investors may repatriate their money home and in time, a new global reserve currency could emerge alongside the dollar, they wrote.
“It would have sounded fanciful only a month ago, but after Europe’s fiscal paradigm shift, perhaps it could be the euro,” Nomura analysts wrote.
Two think tank researchers wrote on Monday that Trump is undermining the dollar’s role in global financing and as a reserve currency.
“The world is openly questioning whether the US is a reliable partner,” wrote Steven Kamin, a senior fellow at the American Enterprise Institute, and Mark Sobel, the US chair of the Official Monetary and Financial Institutions Forum.
Euro and yen in the running for reserve currency status
The euro is trading around 1.09 against the dollar. If it soars well above 1.11 against the dollar and stays at the level this year, this may indicate that global reserve managers are reallocating away from the dollar, according to Macquarie’s Wizman.
He wrote that the euro and yen are the “obvious candidates” to become reserve currencies.
To be sure, analysts still largely agree that King Dollar is the world’s reserve currency. The greenback’s role as the world’s reserve currency has been under discussion in recent years on concerns including the use of the US-dominant global financial system in sanctions and now, Trump 2.0.
“Given growing distrust over US management of America’s economic and geopolitical foundations, investors may begin to search more intently for possible other dollar alternatives or workarounds,” Kamin and Sobel wrote.
