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By Hugh Cameron
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Declining confidence in the U.S. economy—and the stability of a U.S.-led political order—is putting downward pressure on the country’s currency while propelling "safe haven" assets to unseen heights.
The U.S. Dollar Index, which measures its value against a basket of major fiat currencies, has sunk sharply in recent days and is now down over 10 percent compared to the same point last year. Meanwhile, silver and gold prices have continued to trend in the opposite direction, the latter surpassing the $5,000-per-ounce milestone over the weekend for the first time ever and far earlier than even bullish forecasters had anticipated.
And experts believe this bifurcation arises from a common confluence of factors.
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"Gold and the dollar are reacting to the same diagnosis: political uncertainty, lower real rates, and fading confidence in U.S. policy direction," Ewa Manthey, a commodities strategist at ING, told Newsweek. "The dollar’s slump isn’t causing the gold rally—they’re two symptoms of the same macro story."
Why It Matters
The strength of any fiat currency, while influenced by several things, is broadly tied to supply but also the international credibility of its issuing country. Prolonged weakness can have broad implications for an economy, including reshaping trade flows, raising import costs and accelerating inflation, while also boosting the attractiveness of supranational assets such as gold.
What To Know
"Precious metals have extended their rally into the new week, offering further evidence of a deepening crisis of confidence in the U.S. dollar and the broader monetary order," Daniela Hathorn, senior market analyst at Capital.com, wrote in a press note on Monday.
"Central banks, particularly outside the Western bloc, have continued to diversify reserves away from the dollar, lending structural support to gold prices," she added.
Analysts say fears over America’s fiscal health, mounting debt levels, and the independence of the Federal Reserve against executive branch attacks have gradually dampened perceptions of the economy and, in turn, the strength of the dollar.
But according to economist Robin Brooks, "markets drew the line last week on Greenland," and Donald Trump’s renewed threats to purchase or annex the Danish-owned territory have been behind the most recent, sharp drop.
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In a post to Substack on Monday, Brooks said that the "perception of policy chaos" in America’s ambitions was reminiscent of that which followed Trump’s "Liberation Day" tariffs—which sparked a similar decline for the currency—and that markets are now similarly fearful that "the fight over Greenland and the chaotic manner in which this was handled will backfire on the U.S."
And while Trump has ruled out using military force to acquire Greenland, and backtracked from tariff threats against nations opposing this plan, recent events have nonetheless sown distrust in the economic leadership of the U.S., according to Adrian Ash, director of research at the gold trading platform BullionVault, who told Newsweek there are now several "question marks and doubts over U.S. supremacy."
These concerns, to Ash, were aptly captured in Mark Carney’s recent address to the World Economic Forum (WEF), during which the Canadian Prime Minister said that the rules-based and U.S.-led world order, while perhaps always a convenient fiction, was now over.
And Trump’s tariff and annexation threats themselves sparked talk of another "Sell America" trade, as some foreign investors and sovereign institutions began disposing of assets like U.S. Treasuries over "fears of prolonged uncertainty, strained alliances, a loss of confidence in U.S. leadership," IG market analyst Tony Sycamore told Reuters last week.
Adding to this pressure is the prospect of the U.S. stepping in to strengthen the Japanese yen, after the country’s officials indicated that a coordinated intervention to sell dollars against the currency could be on the table.
What People Are Saying
Raphaël Gallardo, chief economist at asset management firm Carmignac, told The Guardian in mid-January: "Investors—private and sovereign—believe their strategic reserves are no longer safe in dollar terms, as they can be confiscated overnight. The dollar is losing the credibility as the nominal anchor of the global monetary system because the Fed is losing credibility, and U.S. Congress is losing its credibility."
Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, wrote: "What’s fascinating is what markets react to and what they ignore. They ignored various assaults on the Fed, including efforts to remove Lisa Cook and the threat of criminal indictment of Chair Powell. That’s remarkable, but—as people say in markets—it is what it is. But markets drew the line last week on Greenland. The Dollar fell very sharply in a move that looks like it’s still building."
What Happens Next
Looking ahead to the next few days, analysts say the upcoming rate decision from the Federal Reserve—and the subsequent press conference from Chair Jerome Powell—could put some upward pressure on the dollar. The central bank is widely expected to hold rates at their current range following its meeting on January 27 and 28.
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