Dollar at Four‑Year Low: Unpacking the Slide and What Comes Next

The U.S. dollar fell to its weakest versus the euro since September 2021, weighed down by fiscal concerns over the new spending bill, trade‑deal uncertainty and growing bets on Fed rate cuts. Here’s a deeper look at the forces at work, and the currency‑market implications.

Fiscal Risks and Trade Uncertainty

President Trump’s proposed $3.3 trillion spending and tax‑cut bill has reignited worries about the U.S. deficit. When investors fear higher future debt issuance, they often sell dollars—especially against economies with stronger fiscal positions.

At the same time, stalled trade talks with key partners and tariff back‑and‑forth have dented confidence in the dollar as a safe haven.

Fed Easing Expectations

Market‑implied odds of Fed rate cuts have surged ahead of this week’s data heavy agenda, notably Thursday’s nonfarm payrolls. A more dovish Fed erodes the interest‑rate premium behind dollar‑bull trades, prompting further selling pressure.

Currency Performance Snapshot

• Euro: Near $1.1808, up 13.8% YTD—the strongest first‑half gain on record.

• Sterling: Around $1.3739, close to a 3½‑year peak.

• Yen: Firmed to ¥143.77 per dollar, a 9% rally—the best start since 2016.

• Dollar Index: Slipped to 96.612, the weakest since February 2022.

Implications for Investors

1. Diversification Appeal: With fiscal and monetary risks rising, non‑ dollar assets and carry‑trade plays may outperform.

2. Import Costs: A weaker dollar makes imports more expensive, potentially stoking U.S. inflation.

3. Emerging Markets: Many EM currencies rallied; monitor for take‑profit signals as central banks respond.