The U.S. dollar index fell to 97.56 on Friday, marking its lowest level since October 2025 and extending a slide that has left the world's reserve currency down more than 9% over the past 12 months. The decline reflects growing unease among currency traders about the predictability of American economic policy under the second Trump administration.

A Week of Whiplash

The dollar's latest leg lower came after a particularly volatile week for U.S. foreign and trade policy. Early in the week, President Trump threatened major European countries opposing his interest in acquiring Greenland with new tariffs, sending markets into a tailspin. Days later, he reversed course and suspended the tariff threats, citing progress toward a "framework agreement."

This pattern of announcement and reversal has become familiar to market participants, but its impact on the dollar has been cumulative. Each policy swing erodes confidence in the stability and predictability that international investors prize in reserve currencies.

"The world's leading reserve currency is now directly affected by the administration's latest policy pronouncements. Currency markets crave certainty, and right now, that's in short supply."

— Senior currency strategist at a major international bank

Measuring the Decline

The dollar's weakness is evident across multiple time horizons:

  • Weekly: The DXY has fallen more than 0.9% since Monday
  • Monthly: Down 0.4% over the past four weeks
  • Year-over-year: Down 9.2% from January 2025 levels
  • Full-year 2025: The dollar index dropped 9.3%, its worst annual performance since 2020

The Greenland Episode

President Trump's renewed interest in acquiring Greenland—a self-governing Danish territory rich in rare earth minerals and strategically positioned in the Arctic—has been a particular source of currency market volatility. The administration's hawkish rhetoric toward Denmark and suggestions that "all options are on the table" created uncertainty about U.S. intentions and reliability as an ally.

While Trump later moderated his stance after discussions at the World Economic Forum in Davos, the damage to dollar sentiment had already been done. Currency traders noted that even if specific threats are walked back, the precedent of using tariff threats against NATO allies carries lasting implications for how international investors view dollar-denominated assets.

Federal Reserve Expectations Add Pressure

Beyond geopolitical factors, the dollar is also facing headwinds from shifting expectations about Federal Reserve policy relative to other major central banks. Markets are pricing in the possibility that the Fed may need to cut rates more aggressively than its international counterparts if economic growth slows.

The benchmark federal funds rate currently sits at 3.5% to 3.75%, and while the Fed is widely expected to hold steady at next week's January meeting, traders anticipate resumption of rate cuts by mid-year. This narrowing of rate differentials tends to reduce the dollar's attractiveness to yield-seeking investors.

Fed Chair Transition Adds Uncertainty

Adding another layer of uncertainty, Fed Chair Jerome Powell's term expires in May 2026, and President Trump is expected to announce his nominee for the position shortly. The prospect of a less independent Fed—or one more willing to accommodate political pressure—has factored into dollar weakness.

  • Current frontrunner: National Economic Council Director Kevin Hassett
  • Prediction market odds: 43% probability for Hassett nomination
  • Market concern: Potential compromise of Fed independence

Winners and Losers

The dollar's decline creates divergent impacts across the economy:

Beneficiaries of Dollar Weakness

  • U.S. exporters: Products become more price-competitive abroad
  • Multinational corporations: Foreign earnings translate to more dollars
  • Commodities: Dollar-priced assets like gold and oil become cheaper for foreign buyers
  • Emerging markets: Dollar-denominated debt becomes easier to service

Those Facing Headwinds

  • American tourists: Travel abroad becomes more expensive
  • Importers: Foreign goods cost more in dollar terms
  • Foreign investors in U.S. assets: Currency losses offset investment returns

The Outlook for 2026

Currency strategists are divided on where the dollar goes from here. Many expect continued weakness in the first half of the year, with the DXY potentially falling to the 94-95 range as Fed rate cuts materialize and global growth improves.

However, others caution that the dollar is unlikely to decline continuously. Major banks differ on timing, but most agree that at least one meaningful dollar recovery phase is likely during 2026, particularly if U.S. economic growth remains stronger than expected or if international turmoil increases demand for safe-haven assets.

For now, the consensus view has the dollar trading in a range of 97 to 101 through the first quarter, with the balance of risks tilted toward further weakness. But in currency markets shaped by presidential tweets and tariff threats, consensus views can change in a moment.