The US Dollar is facing an uncertain path after it rebounded from March 2022 lows/ The currency is caught between rising geopolitical tensions in the Middle East, President Trump’s policies and mixed economic data.
Safe-haven demand for the USD surged since the escalations of military tensions in the Middle East on June 13. But President Trump’s tariff policies, which created uncertainty in the global economy and fiscal concerns in the US could still weaken the USD.
Geopolitical Tensions and the USD’s Limited Safe-Haven Appeal
Last Friday, tensions between Israel and Iran escalated into a military conflict. The US Dollar index rose by 0.9%, which marks the biggest one-day rise in a month as markets shifted to safe-haven assets such as the greenback, gold, Swiss Franc and Japanese Yen.
But despite the short-term gains, markets are questioning whether the USD can maintain its safe-haven appeal in the long term. Historically, the USD has been a major safe-haven currency during times of geopolitical tensions or financial turmoil.
However, its appeal could start to fade due to ongoing uncertainties with US fiscal policies and global trade uncertainties.
Source: TradingView: US Dollar Index performance since 2022
Trump’s Trade Policies Pressure the USD
President Trump’s aggressive trade policies have caused a shift in demand in US assets. The US Dollar Index is down 9% YTD, reaching March 2022 lows. Trump’s unilateral tariff threats with other nations and lack of confidence in a US-China trade deal have increased fear across financial markets.
Treasuries and the USD declined after Trump’s tariff announcements on Liberation Day, which was an unusual effect, as described by former Treasury Secretary Janet Yellen. Some speculate that China may be selling Treasuries in retaliation, further pressuring the dollar. These developments have raised questions about the US’s role in the global financial system and the dollar’s status as the world’s reserve currency. ⁽¹⁾
Inflation Risks and Federal Reserve Pressures
Since inflation has fallen, price pressures have been muted, which may lead to more Fed rate reductions. The Fed’s plans may become more complicated, though, if Trump’s trade tariffs continue to drive inflation in 2025 and 2026. The Fed may be cautious on interest rates because of Middle East tensions that caused oil prices to rise and inflationary risks to rise. ⁽²⁾
Is the Dollar Losing Its Global Dominance?
The US Dollar’s decline amid global challenges has sparked speculation over the term “de-dollarization” and has analysts questioning whether the greenback is losing its role as the global reserve currency.
The DXY Index is on track for a weekly decline of nearly 1%, its largest in over three weeks, with losses against the yen, Swiss franc, and euro. Investors have expressed concerns over both the US economy’s outlook and America’s role within the global financial system due to Trump’s policies. ⁽³⁾
However, the US government’s embrace of cryptocurrencies could bring back support for the US Dollar. The Senate voted last week to advance the GENIUS Act, putting the bill, which establishes a legal framework for stablecoins, one step closer to becoming lawful. ⁽⁴⁾
Analysts agree that the mainstream adoption of Treasury-backed stablecoins could boost the demand for US government debt, which as a result, could support dollar demand. ⁽⁵⁾
