Confidence in dollar under pressure
One of the main causes of the dollar's weakening is the declining confidence of international investors in the stability of US policy. The Trump administration implemented a series of protectionist measures in 2025, including high import tariffs on goods from China, Japan and Europe, among others. These tariffs have led to inflationary pressures in the US and distortions in global trade chains. In addition, Trump has openly tried to influence Fed policy. By appointing policy-minded governors and pressuring chairman Jerome Powell, the central bank's independence has come into question. This has led to uncertainty about the central bank's independence, future interest rate policy and a decline in the attractiveness of US government bonds as a safe haven.
Capital shifts towards Europe
While confidence in the dollar is waning, the euro is gaining popularity. European institutions, such as the ECB, have stabilised their policies and reforms in countries such as Germany and France have improved the investment climate. The eurozone is benefiting from capital inflows, partly because investors are rearranging their reserves: the euro's share of global currency reserves has risen above 20%, while that of the dollar has fallen to 57.7%. Interest rate differentials also play a role. Although the ECB cut its interest rate to around 2%, the Fed is sticking to a higher rate of around 4.5%, partly due to inflation risks from rates. Still, demand for euros has increased, partly due to expectations that the Fed will have to ease soon.
Powell's speech at Jackson Hole: a tipping point?
During his speech at the Jackson Hole symposium on 22 August, Fed chairman Jerome Powell hinted at possible interest rate cuts. He pointed to a cooling labour market and the inflationary effects of import tariffs. Powell acknowledged that the balance of risks has shifted: inflation remains a concern, but employment is under pressure. Although Powell phrased it cautiously, markets interpreted his words as a signal that the Fed is ready to adjust policy. In doing so, he implicitly confirmed market expectations of a rate cut in September, which put further pressure on the dollar and boosted the euro.
Outlook
If the Fed does indeed cut interest rates and US politics continue to cause uncertainty, a further rise in the euro-dollar rate towards 1.20 or even 1.25 cannot be ruled out. At the same time, the risk remains that unexpected economic data or geopolitical tensions could reverse the trend. Given the volatility of currency markets, it is essential for internationally operating companies to actively manage currency risks. Managing currency risks consciously by using hedging strategies can help protect margins and ensure financial stability.
Courtesy of Joost Derks/iBanFirst