US Dollar Volatility Surges Amid Policy Uncertainty and Geopolitical Developments
The US dollar has experienced significant turbulence this week, marked by heightened volatility driven by unpredictable policymaking and shifting geopolitical landscapes. The currency is on track for its worst weekly performance since June 2025, reflecting growing investor unease over recent developments.
Dollar Index Declines Amid Policy Pressures
The dollar index, which measures the US currency against a basket of six major units, stood at 98.366 after dropping 0.58% in the previous trading session. This decline positions the dollar for a 1% weekly slide, its most substantial downturn in over a year. Market sentiment remains under pressure due to evolving geopolitical scenarios and policy unpredictability.
Recent statements from US President Donald Trump have added to the uncertainty. President Trump announced securing access to Greenland through a NATO agreement while simultaneously withdrawing earlier tariff threats against Europe. Notably, he explicitly ruled out using military force to acquire the Danish autonomous territory, yet these mixed signals have contributed to market instability.
Political Events as Currency Catalysts
Political developments have consistently proven to be powerful catalysts for currency markets, with recent years highlighting the US dollar's heightened sensitivity to shifts in policy, leadership, and geopolitical risk. A comprehensive study by forex brokerage BrokerChooser examines the political moments that triggered the most pronounced movements in the USD against the euro, demonstrating how investors rapidly recalibrate risk during periods of uncertainty.
The analysis reveals that markets frequently react not merely to economic fundamentals but to the policy signals embedded within political events. From presidential inaugurations and trade wars to emergency stimulus packages and tariff threats, each development carries implications for currency valuation.
Recent Volatility and Historical Context
The latest episode of volatility occurred on January 19, 2026, following President Trump's confirmation that he would "100%" implement tariffs on European countries opposing a US takeover of Greenland. This announcement drove the dollar down 0.17% against the euro in a single day. Although modest compared to historical shocks, this movement is significant within its context. Since Trump initially floated the tariff threat on January 17, the dollar has weakened by 0.32%, indicating growing investor discomfort over escalating trade tensions and geopolitical brinkmanship.
Markets faced further unsettlement after Trump refused to rule out the use of military force, reinforcing concerns around policy unpredictability. This pattern underscores how geopolitical maneuvers can swiftly influence currency trajectories.
Key Events Driving Dollar Declines
According to BrokerChooser's analysis, the sharpest single-day fall in the dollar occurred on January 20, 2025, coinciding with Trump's inauguration as the 47th US President. The USD plunged 1.38% against the euro as investors reassessed potential policy risks and uncertainties.
Trade wars have emerged as another major source of downward pressure. On April 11, 2025, the dollar slid 1.16% after China retaliated with 125% tariffs on US goods, reigniting fears of a prolonged economic standoff between the world's two largest economies.
The third-largest decline transpired during the early days of the COVID-19 crisis. On March 27, 2020, the signing of the $2.2 trillion CARES Act sent USD/EUR down 1.07%. While designed to stabilize the economy, the sheer scale of government spending raised short-term concerns regarding debt, deficits, and inflation.
Recurring political flashpoints have consistently pressured the dollar. US debt ceiling standoffs, midterm elections, and substantial fiscal packages—including the $1.9 trillion American Rescue Plan in March 2021—all triggered notable, albeit smaller, declines in USD/EUR.
Even events traditionally viewed as stabilizing, such as Federal Reserve rate hikes, have occasionally coincided with dollar weakness. This reflects the market's tendency to focus on forward guidance and broader macroeconomic risks rather than the headline decision alone.
Notable Political Events and USD/EUR Impact
- Donald Trump Inaugurated as 47th US President (20 January 2025) – USD/EUR change: -1.38%
- China Strikes Back with 125% Tariffs on U.S. Goods (11 April 2025) – USD/EUR change: -1.16%
- The CARES Act ($2.2 Trillion Stimulus) Signed (27 March 2020) – USD/EUR change: -1.07%
- Debt Ceiling Deal Passed (1 June 2023) – USD/EUR change: -0.64%
- US Midterm Elections (8 November 2022) – USD/EUR change: -0.61%
- Biden Signs USD 1.9 Trillion American Rescue Plan (11 March 2021) – USD/EUR change: -0.48%
- Federal Reserve Approves First Interest Rate Hike in Over Three Years (16 March 2022) – USD/EUR change: -0.47%
- US Debt Ceiling Reached (19 January 2023) – USD/EUR change: -0.35%
- 'Liberation Day' Tariffs Announced (2 April 2025) – USD/EUR change: -0.35%
- Capitol Riot (6 January 2021) – USD/EUR change: -0.33%
- Joe Biden Won Super Tuesday (3 March 2020) – USD/EUR change: -0.30%
- First Biden-Trump Presidential Debate (27 June 2024) – USD/EUR change: -0.20%
- Trump Signs 'Big, Beautiful Bill' (4 July 2025) – USD/EUR change: -0.18%
- Trump Confirms Tariff Threat Over Greenland Demand (19 January 2026) – USD/EUR change: -0.17%
- Fitch Downgrades US Credit Rating (1 August 2023) – USD/EUR change: -0.03%
- Super Tuesday (Trump Secures GOP Nomination) (5 March 2024) – USD/EUR change: -0.01%
When Politics Strengthens the Dollar
Not all political shocks weaken the greenback. The strongest single-day gain occurred on November 6, 2024, following Trump's re-election victory speech, when the dollar surged 1.85% against the euro. Initial market optimism was fueled by expectations of pro-business policies, deregulation, and tax incentives.
During periods of acute global stress, the dollar has benefited from its safe-haven status. On March 13, 2020, when the US declared a national emergency over COVID-19, USD/EUR rose 0.68%, as investors sought liquidity and capital preservation amid market turmoil.
More recently, the dollar gained 0.30% on November 4, 2025, following the New York City mayoral election, which markets interpreted as a stabilizing signal for regulatory and political continuity in the US's largest financial center.
Key Events Strengthening USD/EUR
- Trump Victory Speech (6 November 2024) – USD/EUR change: +1.85%
- Trump Declares State of Emergency for COVID-19 (13 March 2020) – USD/EUR change: +0.68%
- Zohran Mamdani Wins NYC Mayoral Race (4 November 2025) – USD/EUR change: +0.30%
- Joe Biden Inauguration (20 January 2021) – USD/EUR change: +0.19%
A Currency Increasingly Driven by Policy Signals
The contrasting reactions underscore a critical theme: the dollar's performance is increasingly shaped by how markets interpret political intent rather than the events themselves. Optimism surrounding growth and reform can drive sharp rallies, but uncertainty regarding tariffs, debt, and geopolitical conflict tends to trigger swift pullbacks.
Commenting on the findings, Adam Nasli, Head Broker Analyst at BrokerChooser, noted that while the dollar remains anchored by its reserve-currency status and deep capital markets, recent years have exposed heightened sensitivity to policy risk.
"The dollar's trajectory has been shaped not only by economic fundamentals but also by policy developments – including fiscal dynamics, tariff implications, and questions around central bank independence – which have heightened sensitivity to shifts in investor confidence and risk appetite," said Nasli.
As interest-rate differentials narrow and global central banks adjust their stances, investors are paying closer attention to fiscal dynamics, trade policy, and questions regarding institutional independence—factors that can rapidly alter risk appetite.
Implications for Forex Markets
For forex traders and investors, the message is unequivocal: political developments are no longer background noise. From tariff announcements to election outcomes, each event can act as a volatility trigger, reshaping currency trends within hours.
"Closely tracking macro data, Federal Reserve communication, and broader risk dynamics is essential to understanding near-term dollar moves and positioning effectively across changing market conditions," emphasized Nasli.
As fears of trade wars and global slowdowns persist into 2026, the dollar is likely to remain on a rollercoaster—responding not just to economic data but to the political decisions that increasingly define the global financial landscape.
