28/01/2026
There are turbulent times ahead for the U.S. Dollar (USD). Social unrest, coupled with efforts to curb the independence of the Federal Reserve by U.S. president Donald Trump and a global tendency to undergo dedollarisation has caused the USD to lose significant value against other currencies since the inauguration of Donald Trump last year. One year of his policies and activities has caused the exchange rate of USD versus EUR to climb, from 1.0493 to 1.2042 at close on January 27th. This represents a 14.8% drop in value. The SP500 returned 15.96% in 2025, meaning in relative terms, a person whose home currency is EUR would have gotten an abysmal total return of 1.16% if they were invested in the SP500.
Donald Trump has made his dislike for the incumbent chair of the Federal Reserve, Jerome Powell, no secret. Jerome Powell was nominated by Trump as chair of the Federal Reserve and acceded in this role on February 5, 2018. This makes the personal attacks directed towards Jerome Powell by Donald Trump a bit ironic. Donald Trump's referral to Jerome Powell as "too late Jerome" illustrates his frustration with the pace with which the Federal Reserve Board of Governors have been adjusting the interest rates. This was followed up by the infamous remarks that "he [Jerome Powell] doesn't have long left anyway", referring to the limited mandate left for Jerome Powell and suggesting that a nominee more obedient to the incumbent president will occupy this position after the mandate of Jerome Powell ends. The reason that this is highly problematic for the USD are two-fold.
First, the mere act of an incumbent trying to influence monetary policy is an absolute red flag. Monetary policy is meant to be fully separated from political discourse, since mandates of central banks are often cited as "achieving price stability through low inflation" (ECB, CBRT) or "achieving price stability and maximum employment" (Federal Reserve). These mandates should and must be considered from a purely non-political and economically objective perspective as the decisions that need to be made to achieve these mandates are to be made from economic data. Political intervention in any central bank introduces a plethora of deviations in this process, such as political bias, conflicts of interest and faulty data collection or interpretation. This results in unoptimised monetary policy, which does not align with economic realities. A recent example of faulty monetary policy and its consequences can be seen in Turkey. In 2019, the then-governor of the CBRT, Murat Uysal, navigated the Turkish economy through a troubling period. The exchange rate of the Turkish Lira (TRY) spiked 43% in one month the year before, and inflation was ticking up. As a member of Recep Erdogan's party AKP, he heeded the demand of the president to lower interest rates, which would lower the inflation rate in the eyes of the president. The interest rate fell 1150 bp in a series of cuts, from 19.75% to 8.25% in August 2020. Shortly after, interest rates were increased again to counter the rapid devaluation of the TRY and Murat Uysal was removed by presidential decree in November 2020. A series of rate increases under Naci Agbal did not stop the rapid loss of value of TRY, and from September 2021, rate cuts were implemented. This resulted in an even bigger depreciation of TRY and noticeable price increases for everyday items, after which Naci Agbal was removed from office by presidential decree in March 2021. Sucessive governors were unable to halt the depreciation of the TRY: the TRY lost 27.8% versus EUR in 2022, 62.5% in 2023, 12.7% in 2024 and 37.9% in 2025. These value losses are not uniquely ascribable to the call of the president for lower interest rates to reduce inflation. The unorthodoxy of this theory aside, the president sacking multiple governors and installing governors who tend to his monetary policy demands have signaled to investors that the TRY had become an unstable currency and that no reasonable value retention could be expected as the monetary policy decisions were politically tainted.
While the Federal Reserve works differently (the president can only sack a governor for cause, and cause needs to be proven or readily apparent), the implication is the same. A political intervention interferes with the process of making sound and data-based monetary policy and erodes trust from investors. The second aspect of the problem for USD comes with the sheer size and importance of the USD. A country like Turkey has a comparatively small and inconsequential economy. The United States, however, is a key economy in the world economy. Political intervention in the Federal Reserve signals to investors that the USD might not be the stable currency it once used to be, as its monetary policy is now suspected of being politically tainted. This will send interest rates on new emissions of Treasury Notes skyrocketing whilst the USD would fall, which will make it much more expensive for the United States government to service its debts. Currently, the Treasury Note yields are already climbing. This illustrates a decreased amount of trust by investors in the US government to honour its debts, demanding a premium to account for the Foreign Exchange Risk and the Credit Risk. The result is that the US government is already having to pay more to acquire liquidity in the bond market. A vicious cycle like this could easily spiral out of control: currently only the debt load is the reason for the bond yields to climb. If this were to be compounded by threatening the Federal Reserve's independence, then the fiscal situation will exacerbate and result in the eventual devaluation of the USD, much like the TRY did.
Considering the latest developments, we think that there is reason to believe that the USD will lose value in the foreseeable future. The social upheaval, combined with the debt load, the prospect of less politically neutral monetary policy and the increasing Treasury Note yields lead us to believe that EUR/USD will reach a level of 1.35 by May this year. This would suggest a 12.5% drop in four months.