Depreciation of the US Dollar: Scale, context, impact

The US Dollar fell again markedly in the second half of January, particularly against the euro. What does this depreciation, which began in early 2025 and follows a long period of appreciation, reflect? What are its effects on the European economy?

The US Dollar experienced a further bout of weakness in the second half of January, pushing the euro-dollar exchange rate to 1.20. This is a relatively high level indeed, above its historical average of 1.16. And in one year, between January 2025 and January 2026, the euro appreciated by 17% against the dollar.

While the recent rise of the euro held attention, it is not the only currency to have suddenly appreciated against the dollar. The dollar's decline has been widespread: it has lost a bit over 2% in effective exchange rate terms, a decline similar to that against the euro or the yen, and the Swiss franc stands out with a more significant appreciation of around 4%.

It should be noted that this depreciation of the US dollar, which began in early 2025 with Donald Trump's return to the White House, is significant (-12% in effective exchange rate terms), but it comes after a long and strong period of appreciation (+45% between mid-2011 and early 2025). So, in fact, the dollar is not weak today: it is less strong.

But what is interesting about this new downward trend is that it is yet another example of its unusual reaction in times of risk aversion. As a global safe haven, the dollar normally tends to strengthen when risk aversion increases, whether this increase comes from the United States or elsewhere.

However, the Greenback no longer seems to benefit from this safe-haven role, at least not as much as in the past, and not automatically: this role was undermined/shaken last year, at the time of Liberation Day, and less confidence has set in since then.

For sure, the US dollar remains the dominant international reserve currency, with no viable alternative at present. But while it should be strengthened by the economic outperformance of the United States, and while the announced increase in tariffs initially pushed it up in early 2025, these supporting factors have given way to concerns about the weakening, due to Maganonomics, of the institutional foundations of the dollar's dominance.

The Trump administration's economic strategy is indeed destabilizing/threatening many of the pillars of this dominance:

• The prudence and predictability of US policy.
• The independence of the Federal Reserve.
• The safety and liquidity of dollar-denominated assets.
• The rule of law and investor protections.
• The stability of the dollar-based international monetary system.
• The strong alliance between the United States and other Western countries.

In addition, the United States must now contend with a new source of weakness: it is much more dependent on external financing than it was 50 years ago. And, slowly but surely, a diversification of foreign exchange reserves is underway.

In a way, the famous 1971 quote from US Treasury Secretary John Connally (“The dollar is our currency, but your problem”) still rings true. Since early 2025, the United States has been regaining (some) competitiveness, which is one of Donald Trump's objectives. And the US President explicitly welcomes this decline of the dollar. But for the Eurozone, whose competitiveness is suffering, it appears to be a problem.

However, the reasons for this USD depreciation also send a less favorable message for the United States, one of mistrust. As for the euro, its effective exchange rate has not moved since last summer (after rising by around 6% in the first half of 2025). This leads us to put its negative impact on growth into perspective.

Furthermore, we see the appreciation of the euro against the US dollar as a sign of Europe's revival, of the region's greater attractiveness and of its economic strengthening. And the good growth figures for the fourth quarter of 2025, published at the end of January, point in this direction.

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