“It’s not just that you’ve had an erosion of US return prospects. It’s also the case that there is more optimism about European fiscal spending and the potential for Europe to provide alternative safe assets that people can invest in.” That’s the assessment of Kamakshya Trivedi, head of Global Foreign Exchange, Interest Rates, and Emerging Markets Strategy Research at Goldman Sachs Research.

While Trivedi says dollar weakness is likely to persist, it takes two to make a currency pair. With tariff-induced uncertainty weighing on US economic prospects, and a broad overallocation of US assets, the Goldman analyst sees the shift benefiting euro and sterling.

New FX paradigm?

Of course, a lot can still happen, as traders’ hopes rise on the news of potential trades deals. As Warren Buffett famously says, ‘never bet against America’. (Not to mention Europe’s own persistent structural weaknesses and vulnerability to a Trump-led trade war.)

However, we can also see the decline of the dollar less as a sign of critical weakness and more as on overdue correction. As Brad Setser points out, “the simple fact that the dollar was exceptionally strong and thus the odds were that it would fall at some point”. So while it may be too early to categorically announce a new paradigm for forex markets, it is clear that the trajectory for EUR and GBP looks quite different from just a few months ago.

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