The dollar is staring at its sharpest January slide in eight years, following a dismal 2025. While many investors take a negative view on the greenback, some are betting on a rebound sparked by resilient U.S. growth.
The dollar index is on track to close out this month with a 1.7% loss, its steepest decline in the month of January since 2018. Renewed uncertainty around President Donald Trump’s approach to foreign policy, concerns about threats to the Federal Reserve’s independence, and the potential for a partial U.S. government shutdown this weekend are weighing on the dollar.
Looking at options market activity, it’s clear that traders are betting heavily on a weaker dollar. With the euro at $1.19, investors are paying more to bet on its rise to $1.24 by March. In contrast, the demand for protection against a drop to $1.16 is lower. Getting more dollars for a single euro means the euro is strengthening, so a skew like this shows the market sees a dollar selloff likely than a recovery.
“The ‘Sell America’ trade is back,” wrote strategist Daniel von Ahlen from TS Lombard. The firm is betting on a basket of undervalued European currencies like the ones from Czech Republic, Poland, and others that could indirectly benefit Germany’s spending.
But here’s the kicker: While many factors point to further dollar weakness, it isn’t crazy to think that the opposite could happen. That makes the contrarian view, which focuses on levers of support for the dollar, important.
Surge in AI-related investment and a stabilizing labor market means the U.S. economy could pick up momentum, pushing the dollar higher, Jonas Goltermann, Capital Economics’ deputy chief markets economist, wrote on Monday. It also helps that Trump has become more selective in his use of tariffs compared with his initial tariff war that was pitted against virtually everyone, he added.
Consequently, the case for further interest-rate cuts is weakening, he wrote. Higher-for-longer interest rates keep foreigners attracted to the U.S. market, supporting the dollar. The Fed decided to keep rates on hold Wednesday.
“Our forecasts for 2026 point to a return of U.S. exceptionalism this year,” Goltermann added, referring to the belief that the U.S. has a distinctive advantage over its peers and that benefits its equity market and the dollar, the world’s reserve currency.
Treasury Secretary Scott Bessent, in an interview with CNBC on Wednesday, said “over time the prices [of the dollar] could fluctuate, but if we have sound policies the money will flow in.”
Gavekal strategist Will Denyer also points to the potential for the Federal Reserve to preserve its independence, which could help the dollar “snap back from the current selloff.”
The Trump administration’s attempt to fire Fed Governor Lisa Cook and the Justice Department’s investigation of Chair Jerome Powell have raised concerns that the bank’s independence could be at risk.
That said, Denyer warned that Trump’s stance toward Greenland and NATO allies remains a negative for the dollar as Europe or the rest of the world could marginally move away from the U.S. assets.Write to Karishma Vanjani at karishma.vanjani@dowjones.com.