Dollar Slips as Trade Optimism Fuels Fed Rate Cut Expectations
The U.S. dollar weakened on Monday, falling against the yen and hovering near a nearly four-year low versus the euro, as optimism over U.S. trade deals heightened expectations for earlier interest rate cuts by the Federal Reserve.
The greenback also stayed close to multi-year lows against the British pound and hit its weakest level in over a decade versus the Swiss franc. These declines followed progress in U.S.-China trade talks and Canada’s move to withdraw a digital services tax to revive stalled negotiations.
As a result, both the Chinese yuan and Canadian dollar saw gains.
Investor sentiment was further shaped by Fed Chair Jerome Powell’s recent congressional testimony, which was interpreted as dovish. He signaled that rate cuts could be likely if inflation remains subdued despite ongoing tariffs.
According to the CME FedWatch Tool, market odds of a rate cut by September have risen to 91.5%, up from 83% just a week ago. While the Fed’s next policy meeting is in July, it won’t reconvene in August.
Chris Weston of Pepperstone noted that markets see a September cut as “a slam dunk.” He also warned that Friday’s U.S. jobs report poses asymmetric risk to the dollar: weak data could trigger a sharp selloff, while strong figures might offer only limited upside.
The dollar came under further pressure after former President Donald Trump renewed criticism of Powell, stating on Friday that he would “love” for the Fed chair to resign. Trump also reiterated his desire to slash the federal funds rate to 1% and replace Powell with a more dovish successor.
Markets are also watching Trump’s proposed tax and spending plan, which the Congressional Budget Office estimates could add $3.3 trillion to the national debt over the next decade.
The U.S. Dollar Index slipped 0.1% to 97.083, staying near Friday’s 3+ year low of 96.933.
- Euro rose 0.1% to $1.1732, just shy of Friday’s high of $1.1754 (the strongest since September 2021).
- Pound sterling edged up 0.1% to $1.3732, nearing its October 2021 peak.
- Dollar fell 0.1% to 0.7978 Swiss franc, after reaching 0.7955 on Friday—the lowest since January 2015, when Switzerland removed its euro cap.
- Against the yen, the dollar dropped 0.5% to 143.90.
- Against the Korean won, it plunged 1.1% to 1,349.40.
On the trade front, U.S. Treasury Secretary Scott Bessent said on Friday that the U.S. and China had resolved disputes over rare earth exports, revising a prior deal made in Geneva. He added that other trade deals could be finalized by Labor Day (Sept. 1), potentially pushing back Trump’s earlier July 9 deadline for reciprocal tariffs.
Analysts at Commonwealth Bank of Australia suggested that this week’s dollar performance will hinge on trade developments. However, they expressed skepticism that so many deals could be completed so quickly. They predicted the dollar may rise against majors like the euro, yen, and pound, but fall versus currencies such as the Australian dollar.
Among other movers:
- Australian dollar rose 0.3% to $0.6550, nearing last week’s 7.5-month high.
- New Zealand dollar gained 0.5% to $0.6083.
- Canadian dollar added 0.1% to C$1.3661.
- Offshore yuan strengthened 0.2% to 7.1596 per dollar.
