The US dollar is rapidly weakening. What you need to know

The main event in the financial markets was the rapid weakening of the dollar. It led to the strengthening of major world currencies, including the ruble, and a jump in gold prices. US President Donald Trump has made it clear that he supports the fall of the national currency. Why this process began and what it will lead to is in the Izvestia article.

How the dollar is falling

• The second half of January was a time of marked weakening of the US dollar. The Bloomberg dollar index, formed on the basis of a basket of currencies from the 12 largest US partners, fell by 3.15% in the period from January 15 to January 27, after which it made a slight rebound. The daily jumps during this period could exceed 1%. The dollar fell by 9.53% over the year, and by 2.21% in incomplete January. The dollar was at its lowest level since March 2022.

• The sale of the US currency is reflected in the exchange rates of other leading currencies. The euro reached $1,199, the highest since 2021. The pound sterling also has a five-year maximum against the dollar. The Swiss franc has strengthened to its highest exchange rate against the dollar since 2015. At the same time, over the past week, the weakening Japanese yen has strengthened against the dollar by almost 5%.

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• The weakening of the dollar has accelerated the ongoing rally in precious metals. Gold broke through the $5,300 per ounce mark after a three percent surge during one trading session. Since the beginning of the year, its value has increased by more than 20%. Silver is growing even faster, having gained 60% since the beginning of the year. It reached a new all-time high of $117.69 per ounce, although it later dropped to $112.59. Platinum and palladium are also growing, albeit at a slower pace.

Why is the dollar falling

• In a broad sense, the dollar's decline is due to investor uncertainty over the policies of US President Donald Trump. They remain alarmed by the geopolitical risks. The overthrow of Venezuelan President Nicolas Maduro, the disputes over Greenland, the threat of new tariffs, and the suggestion of a strike on Iran all fit into the last month and were initiated solely by the White House.

• Trump's domestic policy also does not inspire investors with optimism. They are particularly concerned about the risks associated with pressure on the Federal Reserve System (FRS) and the politicization of its functions (we wrote more about this here). The Fed is expected to maintain interest rates at the next meeting, while Trump insists on lowering them to reduce the debt burden on the US budget. Added to this is the possibility of the federal government shutting down as early as February 1 and, as a result, suspending the publication of economic statistics. The growing reality of the shutdown was a consequence of the harsh nature of Trump's anti-immigration campaign, which is actively opposed by Democrats. At the same time, the US president himself signaled that he was not worried about the dollar exchange rate and did not intend to prevent its weakening.

• In a narrower sense, the fall in the dollar was influenced by the situation in Japan. The usually stable market for its government bonds began to grow sharply in January, burdening the country's already deficient budget. Against this background, Japanese Prime Minister Sanae Takaichi proposed a budget stimulus plan, despite the fact that the country began to experience unprecedented inflation in previous years. Given how global markets are connected, rising yields on Japanese government bonds will certainly lead to a burden on the government debt of other leading economies in the world, including the United States.

• Japan's difficult situation, which may worsen after the early elections on February 8, has led Japanese investors to talk about selling off foreign assets, which amount to $5 trillion. For the United States and Europe, this could be a severe blow to their government bond market. Both Washington and Brussels recently reached discussions about selling off US government bonds, and this idea was rejected by everyone as catastrophic. Japan is ready to resort to it out of desperation in its financial system.

• Japan's only option was to strengthen the yen, which could stop its central bank from taking hasty steps. And this coincided with the talk that the US Federal Reserve conducted a survey of banks regarding the volume of the available yen and its exchange rate, which is a signal for currency intervention — buying currency in order to influence its exchange rate. Thus, the weakening dollar is becoming an aid to strengthen the yen and reassure Japanese investors so that they do not start selling off American government bonds.

What does the fall of the dollar lead to?

• The weakening of the dollar will lead to a flow of capital into quieter assets, primarily gold. Its growth potential has not yet been exhausted, and analysts predict that the milestone of $ 6 thousand per ounce will be overcome. This will be followed by increased demand for major reserve currencies such as the euro, the pound sterling and the Swiss franc. The Chinese yuan may also become more attractive. The dollar will cease to have a dominant role in global calculations.

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• A weak dollar will have a noticeable impact on the US economy. The purchasing power of American companies and consumers will decrease, and inflation will rise, but this will have a positive impact on American exports, which Trump has so persistently sought, and will stimulate domestic production. In the future, a weakening dollar will reduce tariff rates and ease tensions on the global market, while at the same time devaluing the US government debt.

• For Russia, the weakening dollar is rather a negative factor. The export orientation of the economy implies a weakening of the national currency, and in the case of the ruble, it is forced to strengthen. This leads to a drop in the ruble revenues of exporters and, as a result, to a decrease in tax revenues to the budget. The Central Bank's rate hike, which will be discussed at a meeting on February 13, may help strengthen the ruble.

When writing the material, Izvestia talked and took into account the opinions of:

• Inna Litvinenko, Associate Professor of Economics and Management at the Russian State University of Social Technologies;
• Associate Professor of the Department of Economic Policy and Economic Measurements, Maxim Chirkov Institute of Economics and Finance, State University of Management;
• analyst, journalist, and author of the Crimson Digest channel Ivan Danilov.