Dollar Dips to 3-1/2-Year Low as Traders Bet on Aggressive US Rate Cuts
Singapore, June 27, 2025 — The U.S. dollar is teetering near its lowest level in over three years against major currencies like the euro and sterling, driven by growing expectations of deeper Federal Reserve rate cuts in 2025, fueled by speculation over a dovish shift in monetary policy and looming trade uncertainties under President Donald Trump’s administration.
Dollar’s Decline Amid Fed Speculation
The dollar index, which tracks the U.S. currency against six major peers, fell to 97.378, its lowest since March 2022, and is on track for a 2% drop in June, marking its sixth consecutive month of losses, down over 10% in 2025. The euro steadied at $1.1693 after hitting $1.1745, its highest since September 2021, while sterling reached $1.3733, just shy of an October 2021 peak of $1.37701. The yen weakened slightly to 144.73 per dollar, and the Swiss franc held near a decade-high at 0.8013.
Market sentiment hinges on U.S. monetary policy shifts. Traders now price in 64 basis points of rate cuts for 2025, up from 46 bps last week, spurred by Federal Reserve Chair Jerome Powell’s congressional testimony signaling a dovish stance. Speculation that Trump may replace Powell, whose term ends in May 2026, with a more dovish chair has further eroded confidence in the dollar. “The sooner a replacement is announced for Powell, the sooner he could be perceived as a ‘lame duck’,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. Posts on X echoed concerns, with @Reuters noting fears over the Fed’s independence as Trump considers an early replacement.
Tariff Fears and Economic Outlook
Trump’s proposed tariffs, set to take effect by July 9 unless trade deals are secured, are stoking fears of slower U.S. growth, with the economy shrinking 0.5% in Q1 2025. The Fed’s cautious approach, holding rates at 4.25%-4.50% since December 2024, reflects uncertainty over tariff-driven inflation, projected to hit 3.1% in 2025, above the Fed’s 2% target. Morningstar forecasts two percentage points in cuts by 2027, lowering the federal funds rate to 2.25%-2.50%, with the 10-year Treasury yield sliding to 3.25% by 2028 from 4.2% in 2024.
Despite earlier dollar strength—up 7% in 2024 due to robust U.S. growth of 2.7% versus 1.7% for developed markets—the currency faces pressure from structural challenges like a 4.2% GDP trade deficit. J.P. Morgan notes the dollar is two standard deviations above its 50-year average, limiting further appreciation.
Contrasting Global Trends
While the Fed holds steady, other central banks, including the ECB (110 bps cuts expected) and Bank of Japan (47 bps hikes), are diverging, weakening the dollar’s appeal. Fed policymaker Michelle Bowman’s call for a July cut, viewed by some as a sign of waning Fed independence, has added downward pressure, per ING’s Francesco Pesole.
What This Means
The dollar’s slide reflects market bets on a dovish Fed and tariff-related economic slowdown, with investors eyeing alternatives like the euro and sterling. As the July tariff deadline looms, clarity on trade deals and Fed leadership will shape the dollar’s trajectory. Publishers covering markets should monitor upcoming jobs data and the Fed’s January 28-29 meeting for signals on rate cuts, which could further depress the dollar if inflation eases or growth falters.
