Dollar Weakens as Trade Optimism and Dovish Fed Outlook Fuel Rate Cut Bets
GerikSummary:
The U.S. dollar hovered near multi-year lows against major currencies on Monday, pressured by rising market expectations of a Federal Reserve interest rate cut as optimism around U.S. trade deals took center stage....
Dollar Struggles Amid Fed Speculation and Trade Shifts
The greenback slipped to its lowest levels in nearly four years against the euro and sterling, and hit a more-than-decade low against the Swiss franc, driven by renewed optimism over U.S. trade progress and growing belief that the Federal Reserve will begin easing monetary policy sooner than previously thought.
This weakness follows dovish comments from Fed Chair Jerome Powell last week, who signaled that rate cuts were likely if inflation stays in check despite tariff-related risks. The CME FedWatch Tool now shows a 92.4% probability of a rate cut by September, a significant rise from just 70% the previous week.
Geopolitical and Political Pressure on the Dollar
Additional downward pressure came from President Donald Trump’s continued public criticism of Powell, including a suggestion that he would prefer Powell to resign before his term ends in May. Trump also reiterated his desire to slash interest rates to 1%, down from the current 4.25–4.5% range, and pledged to replace Powell with a more dovish Fed chair if re-elected.
The President’s tax-and-spend policy proposals—namely a massive $3.3 trillion fiscal stimulus package—have further spooked bond markets and raised concerns about the long-term sustainability of U.S. debt.
Currency Markets React to Shifting Sentiment
The dollar index (DXY), which tracks the greenback against six major currencies, inched up slightly to 97.276 but remained close to a three-year low of 96.933. The euro eased to $1.1716 after touching $1.1754 on Friday—its strongest since September 2021. Sterling traded around $1.3709, near a peak last seen in late 2021.
The dollar also showed historic weakness against the Swiss franc, dipping last week to 0.7955, a level unseen since January 2015. Against the yen, the dollar remained steady at 144.58.
The Australian dollar, considered a risk-sensitive currency, gained marginally to $0.6537 and approached a 7.5-month high on expectations that commodity-linked currencies would benefit from stabilizing trade relations and rising risk appetite.
Trade Developments Influence Currency Outlook
Investor sentiment was buoyed by comments from U.S. Treasury Secretary Scott Bessent, who confirmed progress in trade talks with China, including a resolution on critical rare earth mineral exports. He hinted that multiple trade deals could be finalized by Labor Day (September 1), even though Trump had initially set a July 9 deadline.
While some analysts remain skeptical about the timeline for concluding so many deals, signs of resolution in key disputes—such as with China—have improved global risk sentiment, which in turn has weighed on the traditionally defensive U.S. dollar.
Despite short-term bounces, the dollar remains under intense pressure from both domestic political dynamics and global economic rebalancing. The Fed’s growing dovish tilt, Trump’s policy volatility, and the fast-evolving trade landscape suggest further downside risks for the greenback—especially if upcoming payroll data or inflation reports reinforce the case for monetary easing.
Source: Reuters
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