The U.S. dollar is struggling. At around USD 1.14 to the euro, it has lost about 9% of its value since the beginning of the year, reaching levels it has not seen since 2021.
This decline against the euro is far from being an isolated case. The dollar is falling against all the world's major currencies. However, for foreign investors, this translates into a significant loss. The question then arises: how far will the dollar fall?
The American currency remains essential
Did April 2, the day of the liberation of the United States, mark a turning point in the foreign exchange markets?
At first glance, this seems obvious. Donald Trump's announcement of tariffs and the subsequent escalation – particularly concerning the announcement of ever-increasing tariffs on China – have led the investment world to question the relevance of still investing in the United States and the ability of the American economy to avoid a recession.
In addition, the White House attacked Jerome Powell, Chairman of the Fed, threatening to show him the door on the pretext that he would be too slow to lower key interest rates. This would undermine the independence of the U.S. central bank.
The financial world was gripped by fear, abandoning the greenback in favour of other currencies.
A decline to be put into perspective
However, this decline in the dollar should be put into perspective. We estimate that the equilibrium value between the U.S. dollar and the euro is around 1.20 USD to the euro. We are unaware whether the exchange rate is moving towards these levels. Despite an impressive wave of bad news from the United States and very high volatility on American assets, the dollar exchange rate remains far from the more than 1.50 USD to the €1 reached during the economic and financial crisis in 2008.
Of course, it is impossible to categorically rule out that we will succeed. Foreigners hold about $31000 billion in American financial assets, including nearly a third of American government bonds. The latter's mistrust of the United States and a rush to the exit would result in an even greater weakening of the USD.
This scenario is reinforced when we know that part of the capital foreigners use to buy American debt comes from their trade surpluses with the United States. Trump's desire to rebalance the American trade balance would reduce foreigners' means of financing the United States' debt.
The dollar remains unavoidable
Nevertheless, we must face the facts: the dollar rate already incorporates a massive dose of bad news, and it would not take much to stabilise. This is partly because the White House has already illustrated its ability to turn around when the markets turn sour on several occasions.
But above all, because most of the factors that lead investors to invest their money in the U.S. or elsewhere remain favourable to the dollar, the real alternatives are not rushing.
The U.S. dollar remains the cornerstone of the global financial system, and no credible alternative exists. This is evidenced by the gold price surge, which has reached new historical highs at 3500 USD per ounce.
The American markets remain – by far – the most liquid, and the dollar is the reference currency for world trade. Let us add to this:
- The American economy remains the most competitive of the major economies;
- Its domestic market is an exception in a world where demand is struggling;
- It has a capacity for innovation that is only challenged by China.
- It is the only major economy to produce enough energy at a good price to meet its needs;
- Offers companies a less cumbersome regulatory and tax framework than many others, which makes it a destination of choice for investors.
Finally, as far as bonds are concerned, the yields offered in the United States are currently higher than those offered in Europe and are even higher compared to Japanese or Chinese yields.
Faced with such a scenario, it is difficult to believe in a dollar collapse, especially since some investors are looking for alternatives reluctantly, knowing that none will be able to offer them the cocktail they have been able to enjoy on the other side of the Atlantic.
The spectre of recession
Therefore, we believe the return to the equilibrium value (around USD 1.20 to €1) and beyond will only occur if the situation deteriorates considerably.
A recession in the United States, the chances of which have risen sharply in recent weeks (pushing us to revise downwards our growth forecasts for this country and the rest of the world), could well mark a new bout of weakness for the American currency.
But then again, such weakness could be temporary. It is well known that when the United States catches a cold, the rest of the world becomes sick. The U.S. economy is more flexible and adaptable and often rebounds faster than others. Therefore, investors may seek refuge in a global crisis with the United States and the USD.
Therefore, we should not say that he is dead too soon or bet against the United States, whose capacity for innovation and adaptation remains impressive. Those who are now moving away from U.S. assets risk missing out on the rebound, which could be violent if Washington normalises policies or agrees on the trade front.
We remain invested in this market on the bond and equity fronts. See our complete portfolio composition:
Despite the wave of bad news from the United States, the dollar has not returned to its equilibrium value and remains far from the 2008 minimums. Beyond the deafening noise from the White House, the fundamentals speak in his favour.