The US dollar is on track for its first weekly gain since mid-March, signaling that pressure on the world’s reserve currency may have peaked. The US Dollar Index, which measures the greenback’s performance against six other major currencies, rose 0.26% to 99.43 on Friday, after bouncing from a three-year low.
According to Capital Economics, the US dollar’s decline since “Liberation Day” contradicts economic theory and experience during the 2018–2019 US-China trade war, where tariffs often led to a strengthening of the dollar. More surprisingly, the dollar has weakened even as bond yields have moved in its favor.
Analysts believe the deviation is due to bond market volatility and a loss of confidence in the US economic exceptionalism, which has been affected by the Trump administration’s erratic policies. However, in the short term, the dollar is expected to strengthen again as interest rate differentials return to support.
While the current administration's unusual policy approach may continue to undermine long-term confidence, Capital Economics stresses that the absence of a strong alternative means the US dollar remains important in the global financial system and will remain the world's primary reserve currency for the time being.
