Four problems of the US Dollar

The dollar index returned to last year's lower bound, which we had not seen since 2022. The drivers are investment portfolio diversification, concerns about the US economic growth slowdown, rumours of FX interventions and active selling by carry-traders. With the weakening of the dollar and the interest rate differential across the eight most liquid emerging-market currencies, this strategy yielded 18% last year. The best result since 2009.

Since the beginning of the year, the strategy has already yielded 1.3%. According to Morgan Stanley, Bank of America and Citigroup, the carry trade will continue to work effectively in 2026. They advise choosing currencies of countries with tight monetary policy, high interest rates and trustworthy central banks.

The US dollar is under pressure from the rotation of investment portfolios away from American assets. By the end of the week on January 21st, capital outflows from ETFs focused on these assets amounted to $17 billion. There are inflows into Europe and Japan, but they are not comparable to those into emerging markets. Specialised exchange-traded funds working with these assets have attracted $134 billion since the beginning of January, which is the best start since 2012.

Rumours of another government shutdown are contributing to the decline in the USD index. Polymarket estimates the chances of such an outcome at 78%. This has risen significantly following the public and Democrats' reaction to the incidents in Minneapolis, which has intensified criticism of Donald Trump's anti-immigration policy. A shutdown could slow US GDP growth and lead to a faster-than-expected return to monetary easing by the Fed.
Rumours that the US and Japan will conduct coordinated currency intervention to weaken the greenback and strengthen the yen are adding fuel to the EURUSD rally. Recently, Finance Minister Scott Bessent said that there is no connection between the exchange rate and the “strong dollar policy”. The White House is keen to weaken the US currency to boost the competitiveness of companies.
In this environment, it should come as no surprise that gold has soared to historic highs. There is growing talk in the market that the precious metal has turned from a hedge against inflation into insurance against Donald Trump's policies.