US dollar hits four-month low amid political turmoil flight

Monday 26 January 2026 - 09:50

By: Dakir Madiha

US dollar hits four-month low amid political turmoil flight

The U.S. dollar index plunged to 97, its lowest in four months, on Monday as speculation mounted over potential joint U.S.-Japanese currency intervention and investors shed dollar-denominated assets amid lingering uncertainty from the Trump administration.

The greenback's drop extended a rough week, with the Bloomberg Dollar Spot Index falling 1.6%, its worst weekly performance since June 2025. The yen surged nearly 1% to a two-month high of 154.22 per dollar after the New York Federal Reserve checked rates with brokers Friday, widely seen as a precursor to coordinated action.

The dollar's decline accelerated after a rare "triple sell-off" on January 20, when U.S. stocks, bonds, and currency tumbled together following President Trump's threat of escalating tariffs on eight European nations until Denmark agreed to sell Greenland to the U.S.

The S&P 500 fell 2.1%, Nasdaq Composite dropped 2.4%, and Dow Jones Industrial Average lost 1.8%, their steepest single-day declines since October 2025. Treasury yields spiked, with the 10-year note rising 7 basis points to 4.30%, despite the weakening dollar, a divergence analysts pinned on risk premiums rather than economic fundamentals.

Treasury Secretary Scott Bessent acknowledged U.S. concerns over contagion from Japanese government bond volatility, noting he had been in touch with his Japanese economic counterpart amid the turbulence.

The dollar's safe-haven status faces scrutiny. Robin J. Brooks, Brookings Institution economist and former Goldman Sachs chief currency strategist, warned on January 24 that a serious dollar depreciation is underway, calling it a very bearish signal.

"In short, the dollar is under pressure, as is the yen and global bond markets," Brooks wrote. "The dominant market theme in 2026 is flight to safety amid debt monetization. Precious metals and safe-haven currencies will climb much higher still."

Gold broke $5,000 per ounce for the first time, up over 8% last week, while silver topped $100 per ounce as investors sought tangible assets. Currencies of low-debt economies like Sweden, Norway, and Switzerland drew inflows as dollar and yen alternatives.

Analysts at Brown Brothers Harriman noted the dollar weakness likely reflects intensified currency hedging by foreign holders of U.S. securities amid eroding confidence in U.S. trade and security policy. Cross-border capital flow data shows European investors sold hefty U.S. stock and bond positions last week.

The dollar slides despite robust U.S. economic data, showing how political volatility overrides cyclical factors. Though Trump dropped Greenland tariff threats after a framework deal with NATO Secretary General Mark Rutte on January 21, analysts warn similar disruptions could recur.

CICC Research analysts wrote that geopolitical risks in the Western Hemisphere may keep rising, with Trump's "America First" approach potentially spurring key economies like the EU to push their own currencies. Markets now eye the Federal Reserve's January meeting for signals on balancing inflation worries against growing financial stability risks.