The US dollar slumped to its weakest level since March 2022 on Thursday after President Donald Trump announced plans to issue letters to trading partners outlining new tariff rates over the coming weeks. These moves come as a 90-day pause on “reciprocal” tariffs nears its expiry next month.
The currency slid nearly 1 per cent against a basket of major currencies — including the pound and the euro. In London trading, it finished around 0.7 per cent weaker, marking a fresh challenge for the greenback.
Currency markets are reacting to the growing sense that trade tensions may be escalating again. Derek Halpenny of MUFG noted Trump’s comments as a clear signal of renewed friction ahead of the official deadline.
A Complex Mix of Trade and Geopolitics
Markets are also weighing other factors. A tentative trade truce between the US and China, announced on Wednesday, has introduced uncertainty. At the same time, the Trump administration has authorised family members of US military personnel to leave the Middle East, reflecting intensifying tensions between the US, Israel, and Iran.
Despite the slide in the dollar, stock markets have surprised on the upside. The S&P 500 rebounded from earlier losses to close modestly higher, marking a swift recovery from its spring dip. In Europe, the Stoxx Europe 600 dipped just 0.3 per cent — a mild setback considering the turbulence in currency markets.
Deutsche Bank’s George Saravelos pointed to another factor contributing to the dollar’s weakness: news that the US Pentagon is re‑evaluating its submarine deal with the UK and Australia, part of the Aukus defence pact. He observed that reduced geopolitical alignment with allies tends to erode US capital inflows. Saravelos also noted that Australian investors were already raising concerns in meetings earlier in the London trading session.
Inflation Data Opening Door to Fed Rate Cuts
Fresh US inflation data released on Wednesday and Thursday surprised on the downside. Cooler inflation has strengthened the case for earlier interest rate cuts by the Federal Reserve. Indeed, futures markets are now fully pricing in two quarter-point cuts this year, dampening expectations for further dollar support.
In contrast, the European Central Bank (ECB) has signalled it is nearing the end of its rate‑cutting cycle. The euro reacted with a near 0.8 percent rally against the dollar, reaching $1.158 — its strongest level since October 2021.
Structural Pressures on the Dollar
The dollar has now fallen almost 10 per cent this year. Ahead of both trade and fiscal challenges—including worries over a rising US budget deficit and potential taxes on foreign investors—market sentiment towards US assets has cooled.
Aviva Investors’ senior economist Vasileios Gkionakis believes the dollar still has further to fall. He says this decline reflects a broader shift away from faith in “US exceptionalism”, raising the US risk premium and pressuring the dollar’s value.
