Investors may hesitate to allocate capital to US assets as the greenback may collapse by 30%. The capital outflow from the US due to its intention to reshape the international trade system has slammed the US dollar hard. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US trade deficit is shrinking in times of recession.
- The US dollar is no longer a safe-haven asset.
- The USD index is falling due to concerns about a downturn in the US economy.
- Long trades on the EURUSD pair can be opened with the target at 1.3.
Yearly US Dollar Fundamental Forecast
In nature, everything strives to achieve equilibrium and balance. The same principle can be applied to the current account and the capital account. If your objective is to reduce or eliminate your foreign trade deficit, it is essential to be prepared for capital outflows from your stock market and a weakening currency. The US administration’s decision to devalue the US dollar was not a deliberate act. Investor sentiment has evolved, and the EURUSD pair is currently trading near 1.15. Notably, the pair may climb even higher.
The notion that all countries are dependent on the US for their exports and profits is inaccurate. An increase in the foreign trade deficit is associated with a corresponding growth in the capital account. Money flows to the US, as evidenced by the significant influx during the 2023–2024 period. The opposite is also true. The decline in the current account deficit occurred during a period of economic recession in the US, and the country’s economy is gradually slipping into a recession.
US Current Account Share of GDP
Source: Wall Street Journal.
A robust economy is associated with a strong currency. In the period leading up to a GDP downturn, currencies tend to depreciate in the Forex market. However, the greenback was an exception. As the possibility of a recession began to impact the markets, investors sought the safety of assets considered to be reliable. This phenomenon is known as the Dollar Smile theory, which posits that the US dollar’s value increases when the US economy is strong and when it is weak. However, the US protectionist policies have caused a shift in this trend.
Investing in US assets is only logical if the USD index does not collapse by 30% in a year and a half. The recent efforts to revamp global trade have led to a decline in the USD to its lowest level since September, and this is just the beginning.
USD Index Performance
Source: Bloomberg.
The greenback is no longer considered a secure investment option; gold, the Swiss franc, and the Japanese yen have emerged as more reliable alternatives. As a result, the US dollar is likely to experience a decline due to the deteriorating state of the US economy and the outflow of capital from North America stemming from a decline in confidence in domestic assets. Trust, after all, is a delicate thing. It is not easily gained, and it can be lost quickly.
The recent comments made by Donald Trump regarding Jerome Powell are likely to be seen as further evidence supporting the view that EURUSD bears are losing ground. The Fed’s autonomy is a matter of significant concern for the financial markets. Any perceived threat to its independence could lead to a rapid outflow of capital from the United States.
Yearly EURUSD Trading Plan
The question that remains is whether the US is deliberately weakening the US dollar or if it has already lost control of this situation. Some Forex market experts believe that the efforts of the US administration are unnecessary, as the greenback is likely to collapse without them. If that is the case, then long positions on the EURUSD pair formed at 1.09 and above should be kept open as long as possible. In 2026, the major currency pair may reach 1.3.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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