The US dollar continued to decline on Monday, hitting its lowest level in nearly four years against the euro and other major currencies including the yen, pound sterling and Swiss franc. The decline was driven by market optimism over progress in US trade talks, which reinforced expectations that the Federal Reserve may cut interest rates earlier than expected.
Fed Chairman Jerome Powell, in his testimony to Congress last week, signaled that a rate cut could be on the cards if inflation remains subdued this summer despite new tariffs. Following the statement, the probability of at least one quarter-point rate cut by September rose to 93.3%, according to the CME FedWatch Tool. However, markets were also warned that an overreaction to the Fed's dovish signals could lead to a sharper sell-off in the US dollar if economic data disappoints.
Donald Trump's latest remarks also added pressure on the US dollar when he again criticized Powell and expressed a desire to cut interest rates to 1%, well below current levels. Trump also reiterated his plan to replace Powell with a more loose-monetary candidate. Meanwhile, a massive tax cut and spending bill now before the Senate is expected to add $3.3 trillion to the national debt over the next decade.
Despite the pressure on the dollar, some positive developments in trade talks have provided some support for market currencies such as the yuan and the Canadian dollar. The United States and China reportedly reached an agreement on rare earth and magnet exports, while several other trade deals are expected to be announced before Labor Day on September 1. However, market analysts expect negotiations with the EU, China, and Japan to be no closer to a comprehensive settlement.
