Dollar Hits 4-Year Low on Policy Fears

The US dollar trades near its weakest level since March 2022, after falling more than 10% over the past year. The greenback dropped 1.3% in a single session against a basket of currencies following comments from President Donald Trump, then extended losses into the following day. 

Trump dismissed concerns over the currency’s decline, calling the dollar “great,” even as markets reacted by rotating into gold, the Swiss franc, and the euro.

Euro Breaks Above $1.20 Milestone

At the same time, the euro surged to just over $1.20, marking its strongest level since 2021. The single currency gained about 2% in a week, its largest weekly advance since last April. In 2025, the euro rose 13% against the dollar, its best annual performance since 2017. 

Traders focused on the $1.20 level due to its historical importance and its role as an informal threshold flagged previously by European Central Bank officials.

Source: X

Policy Uncertainty Erodes Dollar Confidence

Unpredictable US policymaking continues to weigh on dollar sentiment. Recent tariff threats, geopolitical rhetoric involving European allies, and renewed pressure on the Federal Reserve have increased volatility. Trump’s repeated calls for lower interest rates and his open dismissal of dollar weakness have raised concerns around long-term policy credibility. 

Market strategists note that a weaker dollar supports multinational earnings but raises import costs, creating inflation risks at home. What happens next?

Inflation Data Pressures Purchasing Power

Recent US inflation data added to the pressure. December producer prices rose 0.5% month over month, well above forecasts. Annual headline PPI held at 3.0%, while core PPI climbed to 3.3%, its highest level since July 2025. 

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These figures followed years of declining purchasing power. Over the past 30 years, the US dollar lost more than half its value, while data over five decades shows an erosion exceeding 80%. This trend continues to influence how global investors view cash holdings and settlement currencies.

By purchasing power parity, the European Union now matches the United States at roughly $28 trillion. When analysts include the UK, Norway, and Switzerland, Europe’s combined economic size exceeds that of the US. 

Germany-led fiscal stimulus and renewed security spending have improved the region’s growth outlook. As a result, companies and sovereigns increasingly assess euro-denominated trade and reserves as part of diversification strategies.

ECB Watches Currency Strength Closely

European Central Bank officials acknowledge the euro’s rapid appreciation and monitor its impact on policy decisions. ECB Vice President Luis de Guindos previously described $1.20 as a sensitive level. 

A stronger euro reduces import prices and may complicate efforts to lift inflation toward the ECB’s 2% target. Officials focus less on the level itself and more on the speed of the move, which accelerated sharply in recent sessions.

Can the Euro Replace the Dollar?

Despite the euro’s momentum, the dollar still accounts for nearly 60% of global reserves, compared to about 20% for the euro. Deep US capital markets and entrenched trade networks continue to support dollar dominance. 

Still, the current USD to EUR forecast reflects shifting trust dynamics. As inflation pressures persist and purchasing power concerns grow, markets increasingly test scenarios where the euro plays a larger role in global trade and financial flows.