How dollar disorder could be a wake-up call for global investors

• Gold suffered its biggest daily drop since the early 1980s, falling 5% on Monday after the dollar rebounded following Trump's nomination of a new Fed chair to replace Jerome Powell, disrupting popular currency debasement trades.
• Currency volatility has spiked dramatically, with the euro/dollar three-month volatility gauge hitting its highest level since July, while Barclays identifies a new 'U.S. policy risk premium' detaching the dollar from traditional valuation metrics.
• Foreign investors hold nearly $70 trillion in U.S. assets, but Bank of America warns a 'disorderly' dollar decline of 5% monthly could trigger drastic Treasury sell-offs, with portfolio managers now hedging aggressively and reducing North American exposure.

Summary

The U.S. dollar is experiencing extreme volatility in early 2026, driven by unpredictable White House policy and concerns over Federal Reserve independence. After falling nearly 2% in one January week to four-year lows, the dollar index suddenly rebounded, creating widespread market disruption.

Key Market Impacts:

Metals Meltdown: The dollar's rebound triggered sharp reversals in commodities. Gold plunged 5% on Monday following its best month in 50+ years in January, suffering its largest daily drop since the early 1980s. Silver and copper also fell sharply from all-time peaks. Brent crude is heading for its worst week in nearly two months after a 16% January rally.

Currency Volatility: The $10 trillion daily global FX market has seen heightened turbulence. Euro/dollar three-month volatility expectations hit their highest since July. Barclays identified a U.S. policy risk premium, with the dollar detaching from traditional metrics like interest rate differentials.

Foreign Investment Risk: Foreign investors hold nearly $70 trillion in U.S. assets, more than double the past decade. Bank of America warns a "disorderly" dollar decline (5% monthly loss) could trigger severe Treasury sell-offs and tighter financial conditions. European money managers are increasingly wary.

Portfolio Adjustments: Fund managers are taking defensive positions. Janus Henderson shifted to neutral, cutting stocks and gold exposure. Ninety One purchased both put and call options on Treasuries to hedge directional uncertainty. Asset allocators are reducing North American exposure amid trade tensions.

The dollar's unpredictability, driven by White House rhetoric rather than economic fundamentals, threatens to spark broader capital flight from U.S. assets.