Abstract This article explores the macroeconomic consequences of a sharp US dollar depreciation against the backdrop of high US policy uncertainty, fiscal imbalances and growing geopolitical fragmentation. Using the NiGEM global macroeconomic model, we simulate three scenarios: (1) a combined shock to currency and investment risk premia; (2) a broad-based currency risk premium shock and (3) a currency risk premium shock specifically benefiting the euro. The first scenario results in a global slowdown, with pronounced effects on the US economy. In contrast, the latter two scenarios suggest potential gains for the Euro Area, conditional on the euro’s enhanced international role. Realising such gains would require measures to increase the supply and liquidity of Euro Area safe assets. The analysis also highlights risks beyond the model’s scope, including the potential for a financial crisis triggered by a sudden loss of confidence in the US dollar.
Theobald et al. (2026) studied this question.