The U.S. dollar has been fluctuating near a 3.5-year low against the euro and the British pound as traders anticipate deeper rate cuts by the Federal Reserve. This situation unfolds as President Donald Trump’s tariffs approach a July deadline, fueling speculation in the market.
Following a ceasefire in the Israel-Iran conflict, market focus has shifted to U.S. monetary policy. There is increasing chatter about Trump potentially announcing a new Federal Reserve chair sooner than expected, one who might adopt a more dovish approach than current Chair Jerome Powell.
This change could further elevate expectations for rate cuts. Powell’s recent congressional testimony, interpreted as dovish, has contributed to this outlook, with traders now pricing in 64 basis points of easing for this year, up from 46 basis points just a day prior.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, pointed out that an early announcement of a replacement for Powell might lead to his being viewed as a “lame duck.” However, a White House source indicated that a decision regarding Powell’s successor has not been made yet. Trump’s ongoing criticism of Powell and calls for rate reductions have heightened concerns about the Federal Reserve’s independence and credibility.
The dollar index, which tracks the U.S. currency against six others, has fell to its lowest level since March 2022 and is on course for a 2% decline in June, marking its sixth consecutive monthly drop. Concerns about U.S. growth, amplified by Trump’s tariffs, are prompting investors to seek alternative currencies.
Additionally, there is a sense of urgency as the U.S. navigates new trade deals ahead of the July 9 tariff deadline. Recent statements by EU officials and a White House confirmation of an agreement with China regarding rare earth shipments reflect the ongoing negotiations.
Emerging market currencies have also seen gains due to the dollar’s weakness, with traders actively selling dollar positions. Looking ahead, the core PCE price index’s release on Friday may provide further insights into the Fed’s rate direction, with potential implications for ongoing dollar weakness.