Why the dollar just had its worst week in 8 months despite Trump's pivot on tariffs

By Isabel Wang

The U.S. dollar swooned, but stocks and Treasurys bounced off lows after Trump's pivot on Greenland

The U.S. dollar failed to rebound after this week's tumult despite a broader market bounce.

There's plenty for investors to like about the market's rebound off this week's lows - just don't look at the U.S. dollar.

While stocks and Treasurys put in a partial recovery after President Trump's pivot on Greenland, the greenback struggled to keep pace and booked its worst week in eight months.

The ICE U.S. Dollar Index DXY, a measure of the greenback's value against a basket of rivals, fell 1.9% this week, logging its worst weekly performance since May 23. That compares with the nearly 0.4% drop in the S&P 500 SPX for the same period and the flat weekly showing for the Nasdaq Composite COMP, according to FactSet data.

That could suggest the dollar's reputation in global financial markets has been further tarnished by President Trump's latest use of tariff threats, as well as his actions abroad since retaking office a year ago.

"The April 2 [tariffs] opened up new dimensions - and not friendly dimensions, in terms of U.S. tariff policy," said Steve Englander, global head of G-10 foreign-exchange research at Standard Chartered Bank. "The move on Greenland, even if it's walked back, was something nobody was talking about before January."

Now, however, Wall Street has been put on alert about potential spillover risks, including when it comes to U.S. relations with Europe and Canada, Englander noted: "It's not just Greenland."

That's put a damper on the optimism heading into this year about a potential dollar rebound. "The pattern that we've seen is that whenever policy moves, it expands the envelope of policy options in a way that's potentially disruptive, and the market's reaction is to sell the dollar," Englander said.

After a sharp selloff in stocks on Tuesday, Trump on Wednesday backed off his latest tariff threat, saying he would abandon his plan to impose new levies against European allies. He also outlined the "framework of a future deal" regarding Greenland, a territory of Denmark that the president previously wanted to acquire.

All three major U.S. stock indexes enjoyed a two-day rally following Trump's tariff reversal, recovering most of Tuesday's sharp losses, before finishing mixed on Friday. Still, market strategists cautioned that the bounce in stocks could represent only a temporary reprieve for investors. They also didn't rule out the potential for a future U.S. escalation on Greenland or other policy shocks from the Trump administration.

Recent developments in Japan were part of the dollar's weakness on Friday, said Larry Hatheway, head of research at the Franklin Templeton Institute. The Bank of Japan on Friday kept interest rates unchanged as expected - but the Japanese yen (USDJPY) popped 1.6% amid market speculation that the BOJ would intervene in the currency market to boost the yen, which has struggled against other currencies lately.

"Those market events that have occurred in the first three-and-a-half weeks of this year are beginning to shift the fortunes back towards foreign-currency strength or, conversely, a weaker dollar," Hatheway told MarketWatch in a phone interview on Friday.

Others see a tough path ahead for the greenback, especially if the "sell America" trade gains momentum in the new year.

"We fully expect the [ICE U.S. Dollar Index] to continue to grind down and would not be surprised to see it reach 95 this year," said Peter Azzinaro, a senior partner at Agile Investment Management in Florida. The index was trading at 97.48 on Friday afternoon, at last check.

"What will drive that is continued diversification out of the U.S. and into Europe, parts of Asia and emerging markets," he said. "Over the last decade, the market has been overweight the U.S., and there's been a realization that there are better opportunities outside of the U.S."

Azzinaro said the dollar is in the midst of a three- to five-year cycle that began early last year - and predicted that over the next two to four years, the ICE U.S. Dollar Index could fall below 90 and into the 80s.

"The rotation out of the U.S. and into Europe is the most promising rotation in more than a decade because of additional fiscal stimulus in Europe," he noted.

Vivien Lou Chen and Ken Jimenez contributed.

-Isabel Wang

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01-23-26 1651ET