Dollar can only fall, that is the danger

The market is convinced: the dollar can only fall further. But that unanimous pessimism is precisely what poses the danger. As soon as no one believes in recovery anymore, that's often the moment it begins.

Looking at the financial news, it's abundantly clear that the dollar has only one direction to go: further down. US President Donald Trump is gaining increasing influence within the Federal Reserve. This is certainly not boosting the financial community's confidence in the central bank and the dollar. The Fed chairman Trump will soon appoint will undoubtedly advocate for further interest rate cuts. These will come in 2026 in addition to the two interest rate cuts implemented before the turn of the year. A falling policy rate is often a significant headwind for a currency in the currency world. Add to that the fact that Trump's unpredictable policies are increasingly making themselves felt, and it becomes clear that a further dollar decline is a foregone conclusion.

Heavy corrections
Therein lies the danger. When everyone agrees that a price can only go one way, a reversal is usually imminent. This often happens on the stock market as well. When corporate profits are growing strongly and the economic climate is very favorable, everyone has invested as much money as possible in stocks. There are no reserves left to push stock prices higher. Even the slightest cloud looms on the horizon, it's a signal for investors to take profits. Many of the most painful trading days have therefore occurred during a period when the stock market seemed to be booming.

Feint of the dollar
The same phenomenon is occurring in currency markets. One of the best examples came less than twelve months ago. In the run-up to the start of 2025, almost everything pointed to the dollar being worth the same as the euro for the first time in three years. European interest rates were in freefall at the time, while the plans of (then-elected) President Trump seemed poised to give the US economy a significant boost. Instead, Trump's unpredictable trade policies robbed the dollar of its safe-haven status in uncertain times. Combined with the disappearance of the interest rate tailwind, this was the key ingredient for the dollar's 10% decline in 2025.

Small spark, big consequences
A similar scenario could unfold in the coming months. Nearly every economist and investment bank has already positioned itself for a further decline in the dollar. shutdown completes the negative picture surrounding the dollar. Meanwhile, the AI ​​rally on stock markets, fueled by investment flows into the US stock market, still creates considerable demand for the US currency. In Europe, growing doubts about French government finances are actually undermining the euro's strength. History shows that it often only takes a small spark to trigger a significant market reversal. In the futures market, euro positions have already been declining in recent weeks. This suggests that this spark may be closer than you might think.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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