Despite the current turbulence in the US dollar, we see short-term recovery potential for the US currency. According to our economists, the backtracking by the US administration reduces the risk of a US recession and thus the need for the Federal Reserve to react to the impact of the tariffs with rapid interest rate cuts, even if the market currently seems to think otherwise, Commerzbank’s FX analyst Thu Lan Nguyen notes.
Investor confidence in USD is eroding
“Our economists expect the first rate cut in September, while the market is pricing in a cut as early as June. However, we now see a higher low for EUR/USD – 1.08 instead of 1.05 – as the US tariff policy will undoubtedly not only leave its mark on the economy, but will also have weakened the US dollar permanently. We therefore expect the US dollar to continue to depreciate in the longer term.”
“The US government’s goal is to eliminate the US trade deficit. In their view, tariffs are one tool to achieve this goal, while a weak US dollar is likely to be another. Trump is therefore unlikely to tolerate any significant appreciation of the US currency. Any appreciation will now come with the risk of intervention by the US president. What’s more, if the US trade deficit doesn’t fall significantly, actively weakening the US dollar could move up the administration’s agenda. The most obvious avenue would be through the Federal Reserve.”
“Moreover, Trump’s erratic tariff policy is likely to have permanently damaged the belief in US exceptionalism and investor confidence in the dollar’s safe-haven status. The sometimes significant rise in US yields can be explained by the fact that some investors have left US Treasuries due to a loss of confidence. This also justifies a higher USD risk premium. We therefore raise our EUR-USD forecast for the end of 2026 from 1.10 to 1.15.”
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