The dollar continued its fall against major currencies on Friday as uncertainty about the US economic outlook in a trade war cast doubt on the currency’s safe-haven status. Early in the day, China responded to the latest 145% US tariff against it with a 125% tariff on US goods.

The US currency hit a 10-year low against the Swiss franc and a three-year low against the euro, dropping to 88 cents on the euro for the first time since the start of the war in Ukraine. That makes one euro worth $1.14.

Why The Dollar Is Weakening

“The main catalyst is an apparent repatriation trade from European investors, who are selling USD denominated assets and repatriating capital to the eurozone,” says Peter Kinsella, global head of forex strategy at Union Bancaire Privée (UBP).

The greenback is reflecting investors’ worries about an impending recession. “The dollar and Treasuries are acting as high-beta assets to risk sentiment and remain highly vulnerable to further selloffs. Even if the dollar bounces on any hint of positive news on trade now, we suspect repairing the damage will require a broader unwinding of Trump’s protectionism policies,” Frantisek Taborsky, EMEA forex strategist at ING, writes in a note published early Friday.

“The question of a potential dollar confidence crisis has now been definitively answered – we are experiencing one in full force,” he adds. “Yesterday’s cross-asset price action demonstrated a radical shift away from US assets, with both equities and Treasuries declining despite a core CPI reading substantially below expectations.”

For Greg Meier, senior economist at Allianz Global Investors, rising tariffs pose a threat to US economic growth. “This time, the US economy may have a little more trouble avoiding tariff whiplash than in 2018, during Trump’s last trade war, as there is no longer the high fiscal stimulus that there was then.”

According to Meier, however, there may be a more alarming explanation for the recent weakness of the US currency: de-dollarization. “If US institutions have become structurally less reliable, global capital should naturally move elsewhere. This would perhaps erode the USD’s status as a global reserve currency,” he says.

Is EUR-USD Heading Towards 1.20?

The dollar’s sharp decline is acting as a barometer of “sell America” sentiment at the moment. The rotation to other traditional safe-havens like Swiss francs, the Japanese yen or even the euro is justified by the loss of the dollar’s safe-haven appeal.

In its latest market outlook, asset manager DWS expressed conviction that global investors, including Americans, “could reverse their very one-sided dollar positioning further.”

According to ING forex strategists, “The euro remains a key recipient of dollar outflows” and the massive EUR-USD rally is “almost entirely a function of the loss of confidence in the dollar, and not at all justified by underlying short-term rate dynamics.”

That said, they see EUR-USD as overvalued at these levels- by around 4%. However, relatively similar conditions in the summer of 2020 led to an overvaluation peak of 6%. In current terms, that would roughly equal a move to 1.15. “Given the high volatility and poor liquidity conditions of the FX market, 1.15 is a reasonable near-term target for EUR/USD unless decisions in Washington rebuild some sort of confidence in the dollar,” says ING’s Taborsky.

UBP’s Kinsella goes even further: “We think that EUR-USD will continue to rise, and a move towards levels of 1.20 in 2026 is entirely feasible.”

Highly Unusual: Treasury Yield Up, Dollar Down

The yield on 10-year US Treasuries hit 4.55% on Friday, up from 4.17% on April 1st. An increase in Treasury yields and a fall in the dollar is an uncommon situation. Treasury bonds are considered safe-haven assets, just like the dollar in times of market turbulence. Market participants explain this anomalous trend with the declining confidence in dollar assets.

On the contrary, the yield on Germany’s 10-year bund has dropped to 2.53% since Thursday. As we wrote on Wednesday, markets are now favoring German government bonds as safe assets, while recession fears are eroding the confidence in the dollar and US government bonds as haven assets.

According to Lorenzo Ippoliti, founding partner at Cube Investment Research, if Trump’s aim was to weaken the dollar, “this goal is gradually being achieved.”

Sara Silano and James Gard contributed to this story.

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