The dollar’s collapse is irreversible

The recent rally in the US dollar is expected to prove short-lived, with the currency stabilizing temporarily before returning to a broader decline later in the year. Markets are still holding on to expectations of interest rate cuts, as concerns over the independence of the Federal Reserve intensify. The dollar has fallen nearly 11% since Donald Trump took office a little over a year ago. His repeated calls for much lower interest rates, as well as his recent statement that he is not bothered by a weaker dollar, have accelerated the recent decline.

Warsh nomination and the temporary backlash

Following Trump’s decision to nominate former Fed Governor Kevin Warsh to be the central bank’s chairman on Friday, the dollar has recovered some of its losses. Many have interpreted this choice as a sign that there may be fewer rate cuts this year than in other possible scenarios. The euro is expected to remain broadly stable, near $1.18 at the end of February and $1.185 three months from now.

Dollar ‘nervous’ for most of the year

The median forecasts for the euro in the six and 12 months, at $1.20 and $1.21 respectively, are the highest levels since October 2025. For most of the year, including the coming weeks, the dollar is likely to move nervously, Trust Economics said in a note. As noted, “we do not believe the market has yet overcome concerns about the independence and credibility of the Fed.” Dollar positions will remain net negative until the end of February, a view that has prevailed since at least last April. Despite inflation having been above 2% for almost five years – the longest such period since the early 1990s – derivatives markets are still pricing in two rate cuts this year.

Pressure for lower interest rates

At the same time, the ECB is expected to keep its deposit rate unchanged throughout 2026. The government has been particularly vocal about its desire for lower interest rates, despite the fact that inflation remains persistent and above target. There is a risk that the Fed will underestimate the upside risks to inflation and cut rates further than is appropriate. This could lead to lower real interest rates, a steeper yield curve and further gradual depreciation of the dollar throughout the year.