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By Amanda Cooper, Dhara Ranasinghe and Samuel Indyk
LONDON, Jan 26 (Reuters) – The dollar is coming under fire again in the first few turbulent weeks of 2026 as a growing range of factors — including Washington’s desire for a weaker dollar — prompts a rethink of investors’ optimistic assumptions for a period of stability for the currency.
The dollar on Monday was heading for its biggest three-day slide against a basket of major currencies since last April, when U.S. President Donald Trump’s “Liberation Day” tariffs unleashed an almost unprecedented selloff in U.S. assets.
In his first year in office, Trump’s erratic approach to trade and international diplomacy, his attacks on the Federal Reserve that undermine its independence, and huge increases in public spending pushed the dollar down 10%.
The dollar is again underperforming other major currencies including the euro, sterling and Swiss franc.
WHIRLWIND RATE OF CHANGE
“There are a number of factors coming together,” said Seema Shah, chief global strategist at Principal Asset Management, which manages just over $600 billion worth of assets.
“I don’t think this is a ‘Sell America’ trade, but the fundamentals are coming together, and faster than expected.”
Just this month, Trump has threatened to take control of Greenland, slap more tariffs on European allies over the matter, moved to criminally indict Fed Chair Jerome Powell, and overseen an operation to seize the president of Venezuela. On Saturday, he threatened Canada with an effective trade embargo.
While he has backed down on his threats over Greenland and European tariffs, and markets have shaken off the strike on Venezuela, the backdrop is tense.
Market measures of volatility are still running hot and bond market sentiment is fragile, not least because of an aggressive selloff in Japanese government debt that could spill over into Treasuries, while gold’s relentless scaling of new records is a sign investors are seeking alternative safe-havens.
Trump’s domestic policies, including an aggressive crackdown on illegal immigration that has killed two U.S. citizens this month and sparked protests, 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 or could even hike rates.
This alone makes the dollar less appealing to investors, who could opt to put their money somewhere where lending rates are rising.
Powell, who has resisted pressure from Trump for faster rate cuts, steps down in May. Online betting markets now attach a 50% chance to BlackRock’s Rick Rieder, an advocate of lower rates like the president, being the likely successor, up from less than 10% a week ago, adding to dollar weakness.
TIME TO MOVE ON
Global equities, meanwhile, roared higher last year, thanks in large part to enthusiasm over artificial intelligence. The performance of the S&P 500 since Trump’s inauguration has lagged that of other markets. The index has risen by around 15% since then, compared with a 95% surge in Seoul’s Kospi index, a 40% rise in Tokyo’s Nikkei and a near 30% gain in Shanghai’s main index.
“At the margin, asset managers are keen to continue to diversify away from the U.S. It’s clear that many had been excessively, or felt they were excessively, overweight U.S. markets,” Chris Scicluna, Daiwa Capital Markets economist, said.
Trump has repeatedly said tariffs are necessary to address trade imbalances, with a focus on currencies of Asian countries with which the U.S. has large trade deficits.
On Friday, the Bank of Japan, together with the New York Fed, was suspected of making a series of rate checks for the yen, a possible precursor to the first bout of joint Japanese-U.S. intervention in 15 years to boost the Japanese currency.
Even with the subsequent yen surge, the Japanese currency is still down around 13% against the dollar in the last year.
TRADE-WEIGHTED DOLLAR FARING MORE STRONGLY
On a trade-weighted basis, however, the dollar has only lost around 5.3% in the last 12 months, based on an index calculated by the Bank for International Settlements.
Investors are becoming more concerned about their dollar exposure, with last year’s decline more down to cyclical factors such as growth moderating, said Nomura’s head of G10 FX strategy Dominic Bunning.
“The difference to me (this year) is that the policies the U.S. is seemingly putting in place are much more antagonistic and geopolitical as opposed to economic with tariffs,” he said.
(Reporting by Amanda Cooper, Samuel Indyk and Dhara Ranasinghe; Editing by Elisa Martinuzzi and Hugh Lawson)
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