The November 2016 election victory for President Trump saw the US dollar rally strongly, but by the time he was inaugurated in January 2017, the US dollar was already on its way down and continued falling for a little over a year before staging a multi-year recovery. The US dollar never recaptured the highs seen in the post-election euphoria of late 2016 and, given the US dollar’s fall in the Covid year of 2020, the president still left the US dollar lower than where he found it.

Nonetheless, if we look at the US dollar since Trump won a second time in November 2024, we see a similar pattern: initial US dollar strength after the election result, followed by a steep slide in the first year of his presidency. If this pattern continues, 2026 should see the US dollar rebound. But is this likely?

The history offers a good guide to the past. Just because the US dollar went through this huge rollercoaster in the early years of Trump’s first term does not guarantee that it will happen a second time around. This being said, the pattern is very close so far given the near-10% fall in the US dollar last year on the DXY index. Many things are different now from Trump’s first term. The dollar started this term higher than the first term, by around 5%, arguably leaving the currency more overvalued. Government debt is more than 50% higher today than when Trump was elected the first time.

Tariff policy has been much more aggressive, and US expansionism seems to be higher given actions and threats against the likes of Venezuela, Greenland and Mexico. And, of course, late in Trump’s first term there was the horror of Covid to deal with. So, in many senses, things seem very different now than back then, and hence any similarity in the dollar’s movements to date may be just a coincidence.

However, the general principles of Make America Great Again (MAGA) are still there in terms of things like tariff and immigration policy, deregulation, attacks on the Fed and more. If these basic principles during Trump’s first term created a short post-election rally, followed by first-year dollar weakness and subsequent strength in the greenback during the next couple of years, could they do so during his second term as well?

The first question is whether there are elements of the MAGA policy mix that seem to cause initial euphoria (and a stronger dollar) when an election is won, followed by a first-year slide in the greenback and then recovery in subsequent years?

Steven Barrow, Head of Standard Bank G10 Strategy, said the MAGA approach can be described as one of ‘breaking things’ to see what happens, such as the global trade order or international law. FX markets may initially be enthused about such an approach when the election is won, but the subsequent introduction of policies that seem to ‘break things’, like tariffs, causes dollar weakness during the early part of Trump’s term as investors get nervous. It is only later, should these policies pay off in terms of US ‘exceptionalism’, that the dollar starts to bear the fruits of the MAGA plan. If this is a fair representation of the situation, it would, indeed, seem to suggest that the US dollar can rally this year and possibly beyond.

However, as noted earlier, many things are not what they were back in 2016 when Trump won the first time. A major difference is debt. If generating exceptionalism comes at the cost of a dangerous buildup in government debt, then it is not at all clear to us that the US dollar should turn around after the first-year fall. Just whether the level of government debt in the US is dangerous or not is a moot point. “There is certainly more angst this time, as reflected in the fact that longer-term yields have risen in spite of Fed rate cuts. It is this that leaves us reticent to think that the US dollar’s performance during Trump mark two will be the same as during his first term”, said Steven Barrow.