Donald Trump admits that he can influence the greenback. The president's words that the fall of the US dollar is great caused the USD index to plummet to a nearly four-year low. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US government is glad to see the dollar falling.
- The US may face capital outflows.
- The risks of a reversal in the euro have increased.
- Long positions opened on the EUR/USD pair at 1.1835 can be increased on a pullback.
Weekly US Dollar Fundamental Forecast
It would seem that the days when oil reacted to even the slightest hint from the Saudi Arabian prince are long gone. Thanks to Donald Trump, those times have returned. As soon as the US president said that the fall of the US dollar was great and helped business, the USD index recorded its worst daily collapse since the introduction of tariffs in April and reached its lowest level in almost four years.
USD Index Performance
Source: Bloomberg.
Donald Trump has long complained about other countries devaluing their currencies. Since he took office as US president, the euro has risen 16% against the greenback, while the Swiss franc and Mexican peso have soared by 19%.
The US administration is pursuing a consistent policy of weakening the US currency. Scott Bessent's statement that there is no connection between the price of the dollar and the strong-dollar policy, as well as the New York Fed's request that banks sell the greenback against the yen, are proof of this. Why did the US intend to help Japan? It is unlikely that it was to support the Washington-friendly government of Sanae Takaichi. Most likely, coordinated currency interventions are part of a plan to devalue the US dollar.
Does Donald Trump understand that he is cutting off the branch he is sitting on? If foreign investors see that the US government is determined to weaken the US dollar, in the best-case scenario, they will increase their currency risk hedging when purchasing US assets. In the worst case scenario, they will stop buying them and start actively selling them off. How will the Treasury then close the huge budget hole?
The euro is one of the beneficiaries of the collapse of the USD index. The EUR/USD pair's reversal risks, which reflect the ratio of premiums for insurance against the single currency's growth and decline against the US dollar, have reached their highest levels since 2020.
EUR/USD Risk Reversals
Source: Bloomberg.
Donald Trump's policies are forcing Europe to follow China's path. It is actively supporting the economy with fiscal stimulus and redirecting exports. It is hardly surprising that a free trade agreement with India has been reached after several years of negotiations. It will double European exports to Asia's third-largest economy within seven years.
Can the Fed save the US dollar? The strong US economy and the long pause in the cycle of monetary expansion seemed to be a protective shield for the greenback. However, markets need to gradually get used to the idea that even a strong economy can have a weak currency.
Weekly EURUSD Trading Plan
The Fed's hawkish rhetoric can offer only temporary support to EUR/USD bears. Against this backdrop, long positions opened at 1.1835 can be increased on pullbacks.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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