US Dollar Precariously Trades Near 3-Year Lows As Trump’s Powell Bashing, Tariff Uncertainty Raise Rate-Cut Odds

The U.S. dollar’s weakness, which has been a theme since the start of the year, continues to play as the odds of a rate cut by the Federal Reserve rise.

The U.S. Dollar Index (DXY), which measures the value of the greenback against a basket of foreign currencies of mainly the country’s major trading partners, fell to its lowest level in more than three years on Thursday.

The index fell to an intraday low of 97, marking the lowest since March 1, 2022, before rebounding to 97.15 by the close. At last check, it rose marginally early Friday.

So far this year, the DXY has lost over 10% even as the SPDR S&P 500 ETF (SPY), an exchange-traded fund (ETF) that tracks the broader S&P 500 Index, has gained over 5%. The Invesco DB US Dollar Index Bullish Fund (UUP) is down over 8%.

Thursday’s multi-year low came amid rising odds of a rate cut by the Federal Reserve. The CME FedWatch Tool, which is based on futures markets’ expectations, now shows a nearly 21% chance of a 25-basis-point (bps) cut at the July meeting.

The probability of a cut of a similar magnitude at the September meeting is 72%.

On Thursday, the Bureau of Economic Analysis (BEA) downwardly revised its first-quarter U.S. GDP estimate to a 0.5% contraction, down from the initially expected 0.2% decline. Continuing claims fell to the lowest level in about four years in the recent reporting week, signaling softness in the labor market. 

Trump’s attack on Fed Chair Jerome Powell, for delaying rate cuts, and his statement about potentially replacing the central bank chair were seen as pointers toward a sooner-than-expected rate cut, pressuring the currency further.

The dollar weakness is also seen as a function of receding confidence in the U.S. economy, as President Donald Trump’s tariffs cloud the outlook. The “Liberation Day” tariffs, which remains suspended until early July, would be reinstated if the Trump administration fails to finalize bilateral trade deals with major trading partners. 

Higher tariffs will dampen growth, potentially pushing the economy into a recession. 

Not pleased with the Trump administration’s efforts to weaponize the dollar during trade negotiations, most nations, especially those in Asia, have begun to move away from the dollar steadily. 

The dollar, despite its recent lackluster performance, remains the dominant currency of exchange. Swift data showed that the greenback accounted for 48.46% of global payments in May, followed by the euro (23.5%), according to a CNBC report.

Key inflation data is due Friday morning, and a tame print could weigh on the currency in the near term.

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