Dollar’s Grip Slips: Investors Hedge as Policy Uncertainty Shadows the Greenback

The US dollar is wobbling—and markets are starting to act like it.

After suffering its largest annual decline in eight years in 2025, the greenback has struggled to regain its footing. Even with a modest rally in recent days, the dollar index remains down about 1% this year, extending last year’s 9% slide and fueling a growing debate over whether the world’s dominant currency is entering a longer period of weakness.

While some in the Trump administration continue to stress their commitment to a “strong dollar,” investors appear unconvinced.

“Fundamentally, we think the recent injection of policy uncertainty will be sufficiently durable to keep the Dollar from making up lost ground,” Goldman Sachs strategists wrote in a recent note. Expectations that the new year would bring support for the economic cycle have instead been rattled by renewed tariff threats, shaking confidence in the currency’s outlook.

The turning point came nearly a year ago.

In the days following President Donald Trump’s announcement of ‘Liberation Day’ tariffs last April, the dollar—long viewed as the backbone of the global financial system—fell more than 5%. Despite sporadic rebounds since then, it has never fully recovered those losses.

For decades, the dollar’s role as the world’s reserve currency—often described as America’s “exorbitant privilege”—has made it a safe haven during times of stress. But some strategists now argue that privilege is being quietly questioned.

“If the reserve status of the USD does depend on the US role in the world—as guarantor of security and a rules-based order—then the events of the past year carry the seeds of a reallocation away from the USD,” said Thierry Wizman, global FX strategist at Macquarie Bank.

Adding another layer of uncertainty is the potential shift in US monetary policy.

Markets are closely watching President Trump’s nominee to replace Fed Chair Jerome Powell: former Federal Reserve governor Kevin Warsh. Though Warsh is known as a monetary hawk, news of his nomination only briefly lifted the dollar, as investors instead priced in aggressive rate cuts under political pressure.

Trump himself reinforced that view.

“If he came in and said, ‘I want to raise them,’ he would not have gotten the job,” the president told NBC News on February 4, adding there is “not much” doubt the Fed would lower rates because interest rates are “way high.”

That message has done little to reassure currency traders.

While the dollar remains the anchor of global finance, investors are increasingly diversifying their hedges—and doing so visibly.

Currencies such as the euro, British pound, and Swiss franc have rallied against the dollar in recent weeks. So have higher-risk emerging-market currencies, including the Brazilian real, Mexican peso, and South African rand.

At the same time, demand for hard assets has exploded.

Gold surged more than 60% in 2025, one of its strongest rallies on record, and is still up over 70% year-on-year despite a recent pullback. Silver, platinum, copper, and even steel have also climbed sharply into early 2026.

“A key accelerant behind the renewed demand for hard assets has been the US dollar,” said Ole Sloth Hansen, head of commodities at Saxo Bank, pointing to concerns over US stability and capital outflows into foreign markets.

Not everyone is ready to call this dollar debasement.

Economists at Bank of America caution that a true debasement scenario would involve a prolonged dollar collapse alongside falling valuations in US financial assets—something that hasn’t fully materialized.

Still, they argue the dollar may have more room to fall, as key drivers of weakness—such as a dovish Fed pivot and the lagging impact of trade wars with Europe and China—have yet to fully play out.

Macquarie’s Wizman agrees the trend could be long-lasting.

“We do not think that over the medium- and long term the USD diversification trade is over,” he said, noting that past periods of dollar weakness driven by geopolitical shifts have lasted a decade or more.

For now, there is still no clear successor to the dollar.

“There are no good alternatives to the dollar for a global currency,” wrote Steven Kamin, former head of international finance at the Federal Reserve, citing the depth and liquidity of US capital markets.

But the tone has changed.

“Whereas a few years back one would have been hard-pressed to foresee a world without dollar dominance,” Kamin added, “now one can readily imagine such a disorder emerging in the coming decades.”

The dollar may still sit at the center of global finance—but for the first time in years, markets are seriously asking what comes next.