The dollar’s credibility is declining globally

The value of the US dollar is falling sharply. The “dollar index,” which reflects the overall strength of the dollar against major currencies, has fallen to its lowest level in about four years. Investors’ distrust of the Trump administration, which has shown a disregard for international order in both political and economic terms, is increasing. The market also believes that the next head of the US central bank may be a proponent of interest rate cuts, which is also putting significant pressure on the dollar’s exchange rate. The prevailing view is that the dollar’s downward trend will continue. On the other hand, while the yen has appreciated against the dollar, its appreciation against other currencies has been relatively limited.

On January 27th, the dollar index fell to around 95.5 in the foreign exchange market, its lowest level in about four years since February 2022. This index, one of the indicators of “nominal effective exchange rates” that comprehensively reflects the performance of major currencies, has fallen by 13% compared to its high in January 2025.

On the 27th, the dollar fell to the range of 1 euro to 1.2 dollars, marking the first time in about four and a half years since June 2021 that the dollar has weakened while the euro has strengthened. The dollar fell to its lowest level against the Swiss franc in about 11 years and to its lowest level against the British pound in four years and four months.

The dollar’s decline is attributed to market distrust of US policy. “It’s great (the dollar is weaker),” US President Trump said on the 27th after the dollar’s depreciation intensified. The market interpreted this as Trump wanting a weaker dollar.

Trump has previously argued that the overvaluation of the dollar has placed a heavy burden on American businesses. On the other hand, some argue that “if good economic policies are implemented, the dollar will naturally strengthen” (US Treasury Secretary Bessenter), making it difficult to determine the extent to which the US government actually wants a weaker dollar.

Trump’s remarks have also been interpreted as allowing the dollar to weaken, increasing market participants’ wariness of his volatile economic policies. State Street Bank’s Tokyo branch manager, Tokuhiro Wakabayashi, stated, “Investors are tired of his unpredictable words and actions. The sell-off of the dollar is very evident, including among long-term investors.”

Distrust of the dollar has intensified since the Trump administration took office. The United States disregards post-World War II Western-dominated principles such as free trade and the rule of law. The Trump administration implemented reciprocal tariffs and deepened tensions with Europe over the sovereignty of Greenland, a Danish territory.

The world is seeking to move away from economic systems dependent on the United States. The European Union is pushing for free trade agreements with India and South American countries.

The selling pressure on the US Federal Reserve (FRB) is also significant. Under pressure from Trump, the candidate advocating for interest rate cuts is highly likely to be selected as the next Fed chairman. The US government’s blatant intervention in monetary policy undermines the central bank’s independence.

Markets are wary of further dollar depreciation. A January survey of approximately 200 global fund managers by Bank of America revealed that the most popular trades are “going long on gold” and “going long on large-cap tech stocks,” followed by “going short on the dollar.”

Australia’s large superannuation fund, the Australian Retirement Trust (ART), is increasing its foreign exchange hedging operations on dollar-denominated assets to counter the dollar’s depreciation.

Funds are flowing into the gold market to hedge against the risks of holding US dollars and dollar-denominated assets. The London spot gold price, a benchmark for international gold prices, broke through $5,400 per ounce (approximately 31.1g) for the first time in trading on January 28, a 25% increase since the end of 2025.

The weakening dollar has also pushed up the yen’s exchange rate. On January 27, the yen rose to a range of 152.0-152.5 yen per dollar, marking a new high in yen appreciation and dollar depreciation in about three months since late October 2025. US authorities initiated a “currency check” on January 23, a preparatory phase for foreign exchange intervention. Market wariness of intervention also supported the yen.

However, the economic fundamentals that previously led to the yen’s depreciation have not changed. Ahead of the Japanese House of Representatives election on February 8, both the ruling and opposition parties included a reduction in the consumption tax in their campaign promises. The funding source for this policy is highly uncertain, and market participants are deeply concerned about the risks of fiscal expansion.

Compared to inflation, the Bank of Japan’s (central bank) policy interest rate is relatively low. Following the exchange rate check, there has been very limited buying interest in non-dollar currencies such as the euro and the Swiss franc.

Masaki Ogawa, chief analyst at Sony Financial Group, stated, “If the source of funds remains unclear after the election, market concerns about Japan’s deteriorating fiscal situation will intensify, and the trend of yen depreciation and dollar appreciation may further accelerate.” Currently, it remains difficult to predict whether the yen can continue to appreciate.