The dollar fell sharply again over the last week or so, having nudged slightly higher in the very early part of the year and currently sits at $1.38 to the pound, the lowest it has been since 2021. President Trump sent it down further when he was asked if he was worried about it and replied “No, I think it’s great. I think the value of the dollar – look at the business we are doing. The dollar’s doing great”.
Currencies are notoriously hard to predict, but Trump has been talking the dollar down and demanding rate cuts since before he was elected for a second time.
There was a series of charts in the Financial Times over the weekend under the heading of “Trumps’s democratic backsliding”. They show the US against a peer group including Hungary, Venezuela, Russia and Turkey. The peer group was selected on ten criteria including the use of state force against civilians, and the independence of courts and the civil service. All have seen notable currency weakness.
Life moves pretty fast these days and A User’s Guide to Restructuring the Global Trading System seems to have been lost in the noise. This was a paper written in November 2024 by Stephen Miran and has formed the basis of a large part of current US government strategy.
The second paragraph starts with “The root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets [he means US treasuries]. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defence umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs”.
A European fund we like made a similar point in their regular quarterly update last week. They quoted a White House National Security Strategy paper published in November 2025, which develops similar themes. Here again they are fairly plainly telling us what they are doing and why. In the case of Europe specifically they seem to want to make sure it remains as a trading partner to the US. They want stability in the region including being able to defend itself against Russia without relying on the US. Trump of course regularly and loudly complains that EU countries do not spend enough on defence, has pushed the numbers up as a percentage of GDP and we have seen large increases in the prices of defence stocks.
There are of course no guarantees. Even the US government publishing multiple papers saying they want a lower dollar doesn’t make it a certainty. But they have been saying this for about 18 months now and the dollar is lower.
There are some catches though. Firstly, large scale deliberate currency interventions can be difficult to maintain. Secondly, a weaker currency tends to be inflationary.
US mid-terms are due later this year and the Republicans are widely expected to do badly as things stand. But why is that? I was shown an Ipsos poll at a conference last week showing the biggest concerns among American voters. A number of sensitive issues that we hear about regularly on the news – immigration most obviously – are on the list but nowhere near the top.
The biggest concern by far and cited by 40% of respondents is the cost of living. The financial world likes to talk about inflation in year-on-year terms. In the UK the Retail Price Index (RPI) has increased 4.1% in 2021, 11.6% in 2022, 9.7% in 2023, 3.6% in 2024 and 4.1% in 2025, and commentary will talk about the rate of inflation falling. But that is a 37.5% cumulative increase in prices if you want to eat food or wear clothes. In 2025 in the UK food prices increased by 4.8% and clothing by 6.3%. These are meaningful increases when you get to the till and they are continuing to increase.
There is a broadly similar pattern in the US, and they have the added complication of a typically large healthcare cost. Healthcare prices increased over 3% in the US in 2025.
Cost of living, inflation, whatever you want to call it is a well-known vote loser and top of the list of voter concerns for a reason. Trump of course has no third term, but it seems likely JD Vance or someone else will want to give it a try.
If the Republicans do badly in the mid-terms with inflation as a key concern, I think we can reasonably expect them to try to do something about it in the following years before the next Presidential election in 2028, with potential consequences for the dollar as part of the process.
Robert Fullerton – Senior Research Analyst
FPC26638
All charts and data sourced from FactSet
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