According to a report from the Financial Times, the Dollar is under pressure as US bond yields continue to fall, driven by fears of slowing economic growth. Investors are increasingly betting that the Federal Reserve will keep cutting interest rates, even though inflation remains high. This shift reflects growing uncertainty about the US economy’s future, raising questions about the Fed’s next move.
US Bond Yields Decline as Growth Slows
The 10-year US Treasury yield fell to 4.32% this week, its lowest level since mid-December. This drop follows a decline from over 4.8% last month, triggered by a series of reports showing weak consumer and business sentiment. As a result, the dollar has lost 1.9% of its value this year against a basket of major currencies, defying earlier predictions that Donald Trump’s return to the White House would strengthen the currency.
Initially, investors believed Trump’s tariffs and immigration policies would fuel inflation, pushing the Fed to keep rates steady. However, slowing growth has complicated this outlook, leading to a decline in real Treasury yields—returns adjusted for inflation. On Tuesday, the yield on 10-year Treasury Inflation-Protected Securities (TIPS) dropped to 1.9%, down from 2.3% last month.
Inflation and Political Pressure Complicate Fed’s Decisions
The Federal Reserve faces a tricky situation. Normally, persistent inflation would prompt the Fed to slow or end rate cuts, or even consider rate hikes. But with economic growth slowing and political pressure mounting, the central bank is caught in a bind. President Trump, who previously criticized the Fed for keeping rates unchanged, later agreed it was the “right thing to do.”
Political pressure isn’t the only factor. Inflation expectations are rising, partly due to Trump’s tariffs. Two-year break-evens—a measure of investors’ inflation expectations—are now at their highest since early 2023. Consumer expectations for long-term price increases are also at their highest since 1995.
Despite this, investors expect the Fed to cut rates by another half percentage point before the end of the year. This shows how worried the market is about the economic slowdown.
Dollar Weakens Amid Economic Uncertainty
The weaker bond yields have contributed to the dollar’s decline, as lower returns on US investments make the currency less attractive. Matthew Morgan, head of fixed income at Jupiter Asset Management, noted that investors are questioning whether the period of “US exceptionalism” is over. Concerns about tariffs, government spending cuts, and unclear monetary policy are making markets nervous about future growth.
This uncertainty has already impacted US stocks, which have fallen from record highs in recent sessions. An S&P survey showed the US services sector contracted for the first time in over two years, further highlighting the economic slowdown.
Stagflation Worries and Future Outlook
There are growing fears of stagflation, a situation where high inflation and slow growth occur simultaneously. UBS analysts described the current economic environment as showing a “stagflationary impulse” due to tariffs and other economic pressures.
Looking ahead, the big question is how the Fed will navigate this complicated situation. If the central bank cuts rates to support growth, it risks fueling inflation. On the other hand, if it keeps rates steady to control inflation, it could deepen the economic slowdown.
For now, the market is betting on more rate cuts, but it remains unclear how long this trend will continue. Investors and policymakers alike will need to stay vigilant as they navigate these economic challenges.
