Dollar Slips Amid Trade Optimism and Fed Rate Cut Bets

The U.S. dollar faced significant pressure on Monday, slipping against multiple major currencies, including the yen, euro, sterling, and Swiss franc. This was in part due to market optimism around U.S. trade deals and growing expectations for earlier interest rate cuts by the Federal Reserve.

The dollar hovered near a four-year low against the euro and remained weak against the yen and the pound. This weakness came amid expectations of a potential breakthrough in trade negotiations, particularly between the U.S. and China, as well as easing trade tensions with Canada. Canada’s decision to scrap a digital services tax to resume stalled talks further bolstered the Canadian dollar, which gained alongside the yuan.

Fed’s Dovish Tone and Market Expectations for Rate Cuts

Investors were particularly focused on Federal Reserve Chair Jerome Powell’s testimony to Congress last week, which was interpreted as dovish. Powell signaled that the Fed may consider rate cuts if inflation remains in check this summer, despite concerns about tariffs. This reinforced expectations for a rate cut as early as September, with the CME Group’s FedWatch Tool showing an increase in the likelihood of at least one quarter-point reduction, now at 91.5% compared to 83% the previous week. This growing anticipation of a rate cut weighed heavily on the dollar.

The upcoming U.S. payrolls report, due later this week, is seen as a key risk event, with analysts highlighting the potential for a market reaction depending on the data. If the report disappoints, it could further fuel expectations of a rate cut, causing further pressure on the dollar.

Trump’s Continued Criticism of Powell and Fiscal Concerns

Adding to the pressure on the dollar, President Donald Trump continued his vocal criticism of Fed Chairman Jerome Powell, reiterating his desire for rate cuts and expressing frustration with Powell’s stance. Trump publicly stated that he would “love” Powell to resign before his term ends in May 2026, and again pushed for the Fed to cut interest rates to 1% from the current 4.25%-4.5% range.

The uncertainty surrounding fiscal policy is also contributing to the dollar’s weakness. Trump’s massive tax-cut and spending proposal is under review in the Senate, with the Congressional Budget Office estimating the bill could add $3.3 trillion to the national debt over the next decade. This added fiscal burden could add to concerns about the long-term health of the U.S. economy.

Currency Movements and Global Trade Developments

The U.S. Dollar Index, which measures the greenback against six major currencies, dropped 0.1% to 97.083, remaining near its three-year low. The euro rose 0.1% to $1.1732, while sterling also gained 0.1% to $1.3732, nearing its highest level since October 2021. The Swiss franc climbed to 0.7978, reflecting continued weakness in the dollar after dipping to a multi-year low against the Swiss currency.

The Japanese yen also saw the dollar retreat by 0.1% to 143.90 yen, with the dollar continuing its weakness in the face of ongoing trade developments. The risk-sensitive Australian and New Zealand dollars also benefited from the improved market sentiment, climbing by 0.3% and 0.5%, respectively.

Meanwhile, U.S. Treasury Secretary Scott Bessent commented on the resolution of issues between Washington and Beijing over shipments of Chinese rare earth minerals and magnets. This deal modification, along with potential progress in other trade talks, further supported the optimism around U.S. trade relations.

Conclusion:

As the U.S. dollar struggles to regain momentum, market participants are focused on a combination of U.S. trade developments, potential rate cuts from the Federal Reserve, and ongoing political dynamics. With expectations for a softer U.S. dollar in the near term, especially if the Fed moves toward rate reductions, the outlook remains uncertain. Investors will continue to watch for key economic data, including the payrolls report and any further indications from the Fed or the White House regarding fiscal and monetary policy adjustments.