U.S. Dollar's Worst Weekly Decline in 8 Months Amid Policy Uncertainty

The U.S. dollar’s performance during the week of January 23, 2026, reveals a significant divergence between currency markets and other asset classes, with the greenback experiencing its worst weekly decline in eight months despite a rebound in stocks and bonds [1]. The ICE U.S. Dollar Index (DXY) declined approximately 1.9%, marking the steepest weekly drop since May 2025, as investors grappled with a combination of tariff threats, geopolitical uncertainty surrounding the Greenland acquisition proposal, and concerns about U.S. policy consistency [1][3].

The currency market’s negative reaction to what was perceived as a positive development for risk assets—Trump’s pivot on Greenland tariff threats—underscores deeper concerns about dollar credibility and the potential for sustained policy disruption. While the S&P 500 recovered to post a modest 0.4% weekly decline and Treasury yields stabilized from mid-week panic levels, the dollar’s continued weakness suggests that currency participants are pricing in longer-term structural concerns about U.S. economic policy [1][4].

The DXY’s decline from early-2025 highs near 110 represents an approximately 10% depreciation, with the index hovering around 98.30-98.50 by week’s end [3]. This move was most pronounced against major currencies, with the euro gaining 0.35% to $1.1726 per euro, the Swiss franc strengthening 0.52% against the dollar, and the Japanese yen remaining near 18-month highs at approximately 158.50 per dollar [2][3].

The dollar’s weakness reflects a confluence of factors that extend beyond typical market reactions to geopolitical events. President Trump’s announcement of new 25% tariffs on European Union goods, effective April 2, expanded what Steve Englander, Standard Chartered’s G-10 FX head, characterized as opening “new, not friendly dimensions” to U.S. trade policy [1]. This characterization highlights the concern that tariff threats are no longer viewed as mere negotiating tactics but as a fundamental shift in how the U.S. approaches its allies.

The unprecedented diplomatic effort to acquire Greenland—including tariff threats on Denmark—created geopolitical uncertainty that eroded dollar sentiment in ways that were not fully offset by the subsequent policy reversal [1][2]. This suggests that once confidence in policy stability is undermined, reversals may not fully restore market sentiment, particularly in currency markets that tend to price in longer-term structural risks.

Analyst perspectives reveal a fundamental disagreement about the dollar’s trajectory. Peter Azzinaro of Agile Investment Management expects the DXY to “grind down” toward 95 by year-end, with potential to fall “below 90 and into the 80s over 2-4 years” [1]. Morgan Stanley’s analysis suggests that Trump’s policies across debt, trade, sanctions, and national security could accelerate the gradual global shift away from U.S. dollar dominance in international markets [3]. However, Bob Savage of BNY cautioned that “this whole argument about European investors selling U.S. assets is very hard to sustain,” characterizing the move as primarily a “risk-management story… more hedging because volatility has risen after very low levels” [4].

The divergence between equity and currency market reactions is particularly noteworthy. Risk assets appear to view the tariff reversal on Greenland favorably, as reduced immediate trade tensions supports corporate earnings expectations. Currency markets, however, are pricing in longer-term credibility concerns that may affect the dollar’s status as a reserve currency [1][4]. This suggests that different asset classes are processing the same information through fundamentally different analytical frameworks.

The analysis reveals several risk factors warranting attention. Geopolitical policy uncertainty represents the primary concern, as the Trump administration’s willingness to use tariff threats as diplomatic leverage introduces systematic risk to dollar stability [1]. This uncertainty makes it difficult for currency markets to price in consistent policy expectations, potentially leading to increased volatility and reduced foreign investment in dollar-denominated assets.

The potential for sustained de-dollarization momentum poses a medium to long-term risk to dollar strength. If foreign investors, particularly central banks, reduce their holdings of U.S. Treasury securities and dollar reserves in response to policy uncertainty, this could create a self-reinforcing feedback loop of dollar weakness [1][3]. Such a development would increase borrowing costs for the U.S. government and potentially force the Federal Reserve into a difficult position of choosing between supporting the dollar and maintaining its inflation-targeting mandate.

Treasury market fragility represents an interconnected risk, as any signs of coordinated foreign selling pressure in U.S. government bonds would compound currency weakness and potentially trigger broader financial market disruption [1]. The bond market’s relative stability during this week’s events should not be interpreted as immunity to these concerns.

Despite the challenges, several factors may support dollar stability. Strong U.S. economic data, including solid personal consumption expenditures (PCE) readings and resilient GDP growth, provides fundamental support for the dollar [1]. Historically, the dollar has benefited from safe-haven flows during genuine global crises, which could provide a floor to any decline if geopolitical tensions escalate further.

The Federal Reserve’s continued credibility in fighting inflation remains an asset for the dollar, as interest rate differentials between the U.S. and other major economies continue to favor dollar-denominated assets for yield-seeking investors [1][4]. Additionally, the relatively measured reaction in Treasury markets suggests that bond investors are not yet pricing in significant de-dollarization risk, which could limit the scope of any dollar decline.

The dollar’s weakness appears to be in a relatively early stage, with the 1.9% weekly decline representing a significant but not yet decisive move [1]. Key data points to monitor over the coming weeks include foreign Treasury holdings reports, Federal Reserve commentary on currency markets, and any further policy developments regarding tariffs or geopolitical negotiations [1]. The April 2 effective date for EU tariffs represents a natural inflection point that could either validate or dispel current dollar weakness.

The U.S. dollar’s 1.9% weekly decline to approximately 98.30-98.50 represents its worst performance since May 2025, occurring despite recoveries in equities and Treasury markets [0][1][2]. The ICE U.S. Dollar Index has declined approximately 10% from early-2025 highs near 110, reflecting investor concerns about tariff policies, geopolitical uncertainty, and potential structural shifts in dollar dominance [3].

Currency market weakness was most pronounced against the euro (down 0.35% to $1.1726), Swiss franc (down 0.52% to CHF 0.7913), and remained pressured against the yen at approximately 158.50 per dollar [2][3]. The Bank of Japan’s decision to keep rates unchanged while maintaining a hawkish stance contributed to yen strength, which typically correlates with dollar weakness [2].

Analyst forecasts range from cautious skepticism—viewing the move as temporary risk management following an extended period of low volatility—to more bearish projections anticipating sustained dollar decline [1][4]. The Federal Reserve’s response function to currency weakness and potential inflationary pressure from a declining dollar remains a key uncertainty for forward-looking analysis [1].

Foreign Treasury holdings data and central bank reserve composition reports will provide important evidence on whether the “de-dollarization” thesis has empirical support or remains primarily a market narrative [4][5]. The divergence between equity and currency market reactions during this week’s events suggests that different investor classes are processing policy uncertainty through fundamentally different analytical frameworks.