By Rania Gule, Senior Market Analyst at XS.com – MENA
The U.S. Dollar Index (DXY) has continued its decline, signalling that markets are beginning to reassess their positions on the greenback in light of major shifts in the global risk landscape. In my view, the index’s drop to 98.70—a one-month low—should not be seen as a mere technical correction. Rather, it reflects a deeper investor appetite for riskier assets, driven by a combination of political and economic factors. President Donald Trump’s decision to freeze the 50% tariffs on EU imports has catalysed a new wave of global optimism, directly translating into downside pressure on the dollar, particularly against the euro and growth-linked currencies.
In my opinion, although the tariff freeze is temporary, it sent a powerful message to the markets that trade tensions may not escalate in the near term. This has eased fears of a global economic slowdown. Considering that trade between the U.S. and the EU represents about 30% of global GDP, any de-escalation on this front creates a more favourable environment for risk assets such as equities and growth-sensitive currencies, at the expense of the U.S. dollar, which has lost some of its safe-haven appeal. From where I stand, the markets are behaving rationally, prioritising global growth prospects over the Federal Reserve’s hawkish stance.
At the same time, we cannot ignore the impact of U.S. domestic economic data, particularly Trump’s proposed spending plan, which, according to the Congressional Budget Office, is projected to cost $3.8 trillion over ten years. This massive figure raises market concerns about a worsening U.S. fiscal deficit, exerting pressure on the dollar through multiple channels, including inflation expectations, interest rate outlook, and public debt sustainability. Under these circumstances, it is no surprise to see increased selling pressure on the dollar, especially if long-term bond yields continue rising, as evidenced by the recent jump in 30-year yields to levels not seen since late 2023.
On the monetary front, investors are closely watching the upcoming FOMC minutes and U.S. GDP data, two events that could have a direct impact on policy expectations. However, current market pricing still reflects a low probability of a rate cut in June, limiting the Fed’s ability to offer near-term support to the dollar. I believe this delicate balance between elevated inflation and the financial pressures stemming from Trump’s fiscal agenda complicates the Fed’s policy path. It may prompt a more cautious tone going forward, with little room for firm guidance on easing.
What’s also notable is the divergence in the dollar’s performance. While it is weakening against riskier currencies—those linked to commodities and emerging markets—it is also falling against traditional safe havens like the yen and Swiss franc. This broad-based weakness in the DXY suggests that the dollar is losing its lustre even in times of uncertainty, pointing to a deeper shift in investor sentiment. Market participants appear to be diversifying away from the dollar, supporting the view that we may be entering a new monetary cycle where the dollar plays a weaker role.
Politically, Trump’s aggressive rhetoric about potentially imposing new tariffs on iPhones and European goods not made in the U.S. keeps markets on edge. While the initial market reaction to the tariff freeze was positive, investors remain fully aware that Trump’s positions can shift rapidly. This keeps political risk firmly in the background, and in my view, will continue to create volatility that may cap any sustainable dollar recovery, especially if it coincides with signs of economic weakness at home.
Moreover, recent remarks by Fed officials such as Mousalem and Cook revealed a blend of optimism and caution. While inflation expectations appear stable and financial markets remain relatively calm, any negative surprises in spending or labour data could force the Fed to reassess its policy stance. This strengthens the argument that the dollar lacks a solid foundation at present, and any disappointment in upcoming data could lead to further declines.
In conclusion, I believe the U.S. dollar is undergoing a genuine repricing, not just a short-term pullback. Improving global risk sentiment, easing trade tensions, and uncertainty surrounding the U.S. fiscal outlook are all steadily eroding the dollar’s strength. While we may see some technical rebounds, the broader trend appears to be downward, particularly if personal spending data falls short of expectations or if the Fed fails to offer meaningful support to the currency. For now, the advantage tilts in favour of other currencies—unless we see a sharp reversal in policy or economic data from the United States in the coming days.