The United States is turning into a banana republic — an extremely unstable political entity whose fate often depends on the export of a single product, typically bananas. Donald Trump is doing everything possible and impossible to relocate manufacturing to the U.S., but in doing so, he deprives Americans of variety. At the same time, the president's attacks on the Federal Reserve Chair and the dismissal of the head of the Bureau of Labor Statistics (BLS) over allegedly falsified employment data are undermining trust in all things American — and the dollar is no exception.

Many are shocked by the antics of the U.S. president. Only a few are taking advantage of them. Since Trump does not want to spend money on Ukraine, Germany will be the one buying weapons from the United States. It will also invest in its defense sector and the expansion of its military-industrial complex. In the long run, this will positively impact German GDP.

As Trump's behavior scares off investors, they pull their money out of U.S. assets. Germany offers them a place to park it. The creation of a €100 billion investment fund to support critical sectors, including defense, energy, and the production of strategic raw materials, is one such investment option. Eventually, this will support the euro. For now, EUR/USD is rising on expectations of a brighter future.

USD Index Performance

Despite its retreat in the first half of the year, the U.S. dollar remains historically expensive. And Trump wants to change that to increase the competitiveness of American companies. The problem is that his criticism of Jerome Powell and the dismissal of the BLS chief are pushing the U.S. closer to the status of a banana republic. And no one wants to invest in such a country.

Most nations around the world use the U.S. dollar as a safety instrument. But Trump's behavior is undermining confidence in the American currency. This threatens a widespread reduction of the dollar's share in global foreign exchange reserves and a rise in U.S. Treasury yields. The White House wants to avoid such a scenario.

Forecasts of the Fed's Monetary Expansion

The cooling U.S. economy and growing expectations of monetary easing by the Federal Reserve further exacerbate the situation. Futures markets are 100% certain there will be at least one federal funds rate cut in 2025, 90% certain of two cuts, and 48% confident in three. Goldman Sachs believes that the European Central Bank's rate-cutting cycle is already over. If the Fed resumes monetary expansion while the ECB stays on the sidelines, a narrowing of U.S.-German yield spreads would allow EUR/USD to soar.

On the daily chart, EUR/USD managed to hold within the fair value range of 1.155–1.178 and is moving toward the fair value level at 1.168. A breakout above this level would increase the risk of a resumed uptrend and provide grounds for adding to long positions initiated from 1.155.