Current developments in the US suggest that the US dollar (USD) is in a consolidation phase. While President Trump’s domestic policies are aimed at drastically reducing government spending and aggressively restructuring the economy, the effects of this strategy will also be felt in international financial markets.
Global Impact of Domestic Policy Decisions
Trump is taking a hard line against institutions he sees as inefficient and a drag on the economy. His approach is akin to a determined ‘housecleaning’ of the bureaucracy, but without considering the long-term consequences. These domestic policy reforms, which are perceived as radical cuts, could change the economic environment in the US over the medium term and have a significant impact on fiscal policy and inflation trends.
The Implications for the USD and the Global Currency Market
A key objective of this policy strategy is likely to be a targeted weakening of the USD. In the past, the US has repeatedly intervened to strengthen its global competitiveness – most recently in the 1985 Plaza Accord and again at the turn of the millennium. A depreciation of the USD would strengthen the export sector and improve the competitive position of the US vis-à-vis other economic powers.
Historical parallels suggest that the current US economic policy strategy points to a new phase of targeted currency manipulation. This could be particularly evident over the next 6-18 months – a period that would strategically coincide with the 2026 mid-term elections.
Currency Effects and Outlook for the Majors
Currency markets are strongly influenced by these developments. Over the past 15 years, the euro has been the most stable currency against the USD after the Swiss franc (CHF). Currencies such as the Australian dollar (AUD), Canadian dollar (CAD), Japanese yen (JPY) and South Korean won (KRW) have depreciated against the euro.
In the Current Geopolitical and Economic Situation, the Following Developments are Likely
The Euro is likely to strengthen against the CAD, partly because the tariffs for Canada will weigh more heavily, and partly because a weakening USD will drag the Loonie down against the Euro.
If China overcomes its economic weakness, the AUD could benefit and remain stable or strengthen against the Euro.
The JPY and CHF could appreciate against the euro in the medium term. This is particularly the case if global financial market uncertainties increase.
The Swiss National Bank (SNB) could force the CHF to weaken against the euro in the short term to support exports if the USD weakens. In the long run, however, this will be reversed because Switzerland has the most solid fiat currency, the Swiss franc.
Conclusion: A New Era in Monetary Policy?
Global financial markets are entering a period of increased volatility that could be exacerbated by US economic policies. The likelihood of a US dollar depreciation from next year is high, although the long-term consequences will depend heavily on the reactions of the world’s central banks. Europe, Asia and emerging markets in particular must prepare for an increasingly challenging macroeconomic environment in which protectionist and fiscal policies will have a decisive impact on the currency market.
In light of these developments, it is essential for companies to factor geopolitical risks into their strategy and consider currency hedging and flexible risk management strategies. The coming months will show whether the US can achieve its economic goals with its “power play” – or whether the global market will react with unexpected counter-reactions.
