In the first year of "Trump 2.0," the US dollar depreciated by nearly 10%, marking the largest decline in a decade

In the first year of Donald Trump's return to the White House, the dollar is experiencing the most severe annual sell-off since 2017.

Faced with dual pressures from economic concerns triggered by the trade war and expectations of the Federal Reserve's loose monetary policy, the safe-haven status of this global reserve currency is under severe test, and the market is reassessing the asset value of the dollar in the "Trump 2.0" era.

According to data from the Financial Times, the dollar has significantly declined by 9.5% against a basket of major currencies this year, marking the largest annual drop in nearly a decade, and has been described by George Saravelos, the global head of foreign exchange research at Deutsche Bank, as one of the worst years for the dollar in the history of freely floating exchange rates. The euro has become the main beneficiary, soaring nearly 14% against the dollar, breaking the 1.17 level, reaching its highest level since 2021.

The key turning point that led to the dollar's weakness began in April of this year, when Trump launched an aggressive tariff war against U.S. trading partners. Although the dollar subsequently regained some ground, the Federal Reserve's restart of the rate-cutting cycle in September put continued pressure on the dollar. Wall Street banks generally predict that as the Federal Reserve continues to push for rate cuts, the dollar will face further weakness next year.

Market analysis indicates that, compared to other major central banks, the Federal Reserve's policy path appears particularly dovish. As investors bet that the Federal Reserve will further lower borrowing costs next year, while institutions like the European Central Bank may maintain or even tighten policies, this policy divergence will continue to weaken the dollar's appeal, a trend that has already had a direct impact on foreign exchange hedging strategies and multinational corporate earnings.

Central Bank Policy Divergence Dominates Currency Market Outlook

As the Federal Reserve's policy path diverges from those of other major economies' central banks, interest rate differentials have become the core driver of exchange rate fluctuations. Current pricing by traders indicates that the Federal Reserve is expected to implement two to three rate cuts of 25 basis points each by the end of 2026.

In contrast, European Central Bank President Christine Lagarde raised growth and inflation expectations this month while keeping interest rates unchanged, stating that "all options should remain on the table," indicating a more hawkish policy stance.

James Knightley, chief international economist at ING, pointed out that the Federal Reserve is "going against the tide" among global central banks and remains in a clearly accommodative mode.

Based on this expectation, Wall Street banks forecast that the euro will rise to 1.20 against the dollar by the end of 2026, while the pound will climb from the current 1.33 to 1.36 against the dollar. Although the dollar's weakness this year benefits U.S. exporters, it poses a performance drag for European companies that generate sales revenue in the U.S.

Uncertainty Over Federal Reserve Chair Nominee Triggers Market Anxiety

In addition to the interest rate policy itself, uncertainty over the leadership of the Federal Reserve has also become an important factor suppressing the dollar's valuation. Analysts warn that Trump's nomination of the next Federal Reserve chair will determine the currency's fate in 2026. If the successor is seen as likely to yield to White House pressure for more aggressive rate cuts, the dollar may face further declines According to the Financial Times, bond investors have expressed concerns to the U.S. Treasury, believing that one of the main candidates, Kevin Hassett, may lower interest rates to please Trump. ING's Knightley analyzes that under the leadership of the new chairman, investors are prepared for a Federal Reserve that is "more interventionist," more aggressive in rate cuts, and "more inclined to act on intuition."

Mark Sobel, chairman of OMFIF USA and former Treasury official, stated that while the erosion of the dollar's dominance by Trump may be a long process, it has become an inescapable psychological shadow for market participants.

Trade War and Hedging Strategies Reshape Capital Flows

Although the dollar has rebounded 2.5% from its annual low in September, partly because the predictions of a recession in the U.S. due to the trade war have not materialized, and the AI investment boom has supported expectations for U.S. economic growth, this has not completely reversed the dollar's decline.

Kit Juckes, a foreign exchange strategist at Société Générale, believes that Trump's economic policies cannot stop the technological revolution occurring on the U.S. West Coast, which limits the Federal Reserve's room for aggressive rate cuts.

However, investor behavior has undergone structural changes. Analysts point out that Trump's chaotic policymaking—especially the market turmoil following the announcement of tariffs in April—has prompted foreign investors to begin hedging their dollar exposure when purchasing U.S. stocks.

Saravelos from Deutsche Bank noted that the dollar's weakness partly stems from a structural reassessment by global investors, particularly European investors, of "unhedged dollar exposure." As more investors hedge through derivatives trading, the dollar faces continued downward pressure