Dollar Slumps to Multi-Year Lows as Fiscal Fears and Fed Pressure Undermine Confidence

Summary:

The U.S. dollar continued to weaken sharply, hitting its lowest level against the euro since 2021, as markets reacted to fiscal risks posed by President Trump’s $3.3 trillion spending plan...

Fiscal Uncertainty and Trade Tensions Undermine Dollar Stability

The U.S. dollar traded at its weakest level in years on Tuesday, burdened by rising fiscal anxiety and unresolved global trade tensions. The greenback’s continued decline reflects mounting investor skepticism toward the U.S.’s fiscal and monetary outlook under President Donald Trump’s administration. The proposed $3.3 trillion tax-and-spending bill, currently stalled in the Senate amid internal Republican divisions, has added to the perception of growing credit risk and policy uncertainty in the world's largest economy.

The fiscal debate coincides with looming tariff deadlines, and Trump's persistent criticism of the Federal Reserve has cast further doubt on the central bank’s independence. These combined factors have triggered a broad reassessment of the dollar’s status as a safe-haven asset.

Euro and Yen Strengthen as Investors Flee Dollar Assets

The euro rose to $1.179, its highest level since September 2021, after gaining an unprecedented 13.8% in the first half of the year. The surge reflects both fundamental strength in the eurozone economy and a shift in global capital away from dollar-denominated assets. The Japanese yen also firmed to 143.68 per dollar, having risen 9% since January—its strongest first-half performance since 2016.

While both currencies have appreciated partly due to relative economic resilience, their gains are also clearly linked to a decline in dollar demand, as investors seek alternatives amid fiscal disarray and political unpredictability in the U.S.

Dollar Index Slides Amid Broad-Based Weakness

The dollar index, which measures the greenback against a basket of six major currencies, dropped to 96.688, its lowest level since February 2022. This marks a more than 10% fall in the first half of 2025, making it the worst such performance since the dollar became a free-floating currency in the early 1970s. This shift is not merely correlational—it signals an underlying erosion of confidence in U.S. fiscal discipline and monetary coherence.

Analysts have pointed to weakening demand at Treasury auctions and waning foreign investor appetite for U.S. government debt as further evidence of this trend. Nathan Hamilton of Aberdeen Investments noted that the “bear steepening” of the yield curve, when long-term rates rise faster than short-term ones, illustrates that investors are beginning to reprice the relative credit risk of the U.S.

Pressure on the Fed Fuels Monetary Policy Concerns

Markets are increasingly pricing in a dovish turn from the Federal Reserve. Traders now expect 67 basis points of interest rate cuts by year-end, based on deteriorating economic indicators and relentless political pressure. President Trump has publicly pressured Fed Chair Jerome Powell, even sending him a list of global interest rates to argue that U.S. rates should be lowered to between Japan’s 0.5% and Denmark’s 1.75%.

Trump's open campaign against Powell and the Fed's policy stance is beginning to affect investor perceptions of the institution's credibility. Although Trump lacks the authority to remove Powell over a disagreement, his actions have introduced a new layer of volatility to monetary policy expectations.

Upcoming Economic Data Adds to Market Anxiety

Markets are now watching closely for Thursday’s nonfarm payrolls report, which is expected to show a slowdown in job growth. Economists forecast an increase of 110,000 jobs in June, down from 139,000 in May, with unemployment expected to edge up to 4.3%. A weaker-than-expected report could reinforce the case for rate cuts, compounding pressure on the already weakened dollar.

Investors are also tracking the July 9 tariff deadline set by the Trump administration. While U.S. officials continue negotiations with trade partners, few concrete agreements have been reached. Trump recently expressed dissatisfaction with progress in U.S.-Japan talks, and Treasury Secretary Scott Bessent warned that countries could still face higher tariffs regardless of ongoing discussions. This uncertainty continues to cast a shadow over global trade flows and exchange rate stability.

The dollar’s sharp drop is not merely a reaction to near-term political uncertainty but signals deeper structural concerns over fiscal sustainability, central bank independence, and the credibility of U.S. policymaking. With a fragile labor market outlook, volatile trade negotiations, and escalating internal pressure on the Fed, the U.S. dollar is facing a rare and simultaneous erosion of both its yield advantage and its safe-haven status. Markets are now bracing for further shifts in capital allocation if these uncertainties persist through the second half of 2025.

Source: Reuters

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