The U.S. dollar is facing renewed pressure as markets digest a sharp escalation in tensions between Washington and Europe, triggered by President Donald Trump’s threats of tariffs linked to his push to secure control over Greenland. The dollar index slid to around 98.5 on Wednesday, marking a third straight session of declines and reinforcing a broader reassessment of U.S. assets as geopolitical risk moves from the periphery to the center of investor decision-making.

Trade Threats Undermine Dollar Confidence

The immediate catalyst for the dollar’s weakness is a deepening standoff with Europe. Trump warned that eight European countries opposing his Greenland plan could face fresh U.S. tariffs unless a deal is reached, reviving memories of earlier trade confrontations that rattled global markets. In response, the European Union has signaled it could impose retaliatory tariffs on roughly $93 billion of U.S. goods, while France is reportedly urging the bloc to activate its Anti-Coercion Instrument — a powerful tool designed to counter economic pressure from foreign governments.

For currency markets, the implications go beyond tariffs themselves. The rhetoric has injected a new layer of political risk into the dollar, traditionally viewed as the world’s primary safe-haven asset. When trade disputes escalate between major economic blocs, investors tend to reassess not only growth prospects but also the stability and predictability of policy frameworks underpinning currencies.

Europe’s Leverage Adds to Market Anxiety

What has made this episode particularly unsettling for dollar bulls is Europe’s potential financial leverage. European investors hold trillions of dollars’ worth of U.S. equities and Treasuries, and markets are increasingly sensitive to the possibility — even if remote — that portfolio allocations could shift in response to political pressure. Reports that a Danish pension fund is planning to reduce or exit U.S. Treasury holdings have amplified those concerns, serving as a symbolic reminder that capital flows can become entangled with geopolitics.

While no broad-based selloff of U.S. assets has materialized, the mere discussion of such moves is enough to weaken confidence. Currency markets often react not to what has already happened, but to what could plausibly occur if tensions continue to escalate.

Legal and Policy Uncertainty in Focus

Adding another layer of uncertainty, investors are awaiting a ruling from the Supreme Court of the United States on the legality of key elements of Trump’s trade policies. A decision that constrains executive authority could limit the scope of future tariffs, potentially stabilizing sentiment. Conversely, a ruling that upholds broad presidential powers would reinforce the risk that trade policy remains a volatile and unpredictable lever.

This legal overhang is important for the dollar because exchange rates are ultimately anchored in expectations around institutional stability. When policy tools appear subject to abrupt shifts or legal challenge, currency risk premia tend to rise.

Currency Performance Reflects Diverging Risks

The dollar weakened against most major currencies during the session, underscoring the breadth of the move. It did, however, hold relatively steady against the yen, reflecting Japan’s own fiscal challenges and limiting the yen’s appeal as an alternative haven. This divergence highlights that the dollar’s slide is less about a wholesale loss of confidence in the U.S. economy and more about relative risk in a world of imperfect substitutes.

Watching the Next Turning Point

Looking ahead, the dollar’s trajectory will hinge on whether US–Europe tensions escalate further or pivot toward negotiation. Any sign of de-escalation could quickly restore some support, given the dollar’s still-favorable interest rate backdrop. On the other hand, sustained trade conflict and politicization of capital flows would challenge the assumption that U.S. assets remain the default refuge in times of stress.

For now, the message from markets is cautious: the dollar is still dominant, but its safe-haven status is no longer unquestioned when geopolitical risk emanates directly from Washington.