The U.S. dollar continued its downward trend throughout the week, weighed down by a combination of political and economic factors that have weakened its appeal in global markets. Chief among these is the stalling of President Donald Trump’s tax cut bill, which has faced resistance within Congress, raising concerns over a potentially widening fiscal deficit. This latest slide comes as part of a broader bearish trend that has persisted since the beginning of the year, further exacerbated by Moody’s recent downgrade of the U.S. credit rating.
Adding to the cautious sentiment around the greenback were the ongoing G7 finance ministers’ meetings. Markets closely monitored any signals related to currency policy, amid speculation that the U.S. may push for looser foreign exchange controls potentially allowing for further dollar weakness. If realized, such a shift would likely be viewed as another bearish catalyst, especially considering Washington’s apparent interest in supporting stronger currencies among its trading partners.
Meanwhile, the British pound benefited from stronger-than-expected inflation data, with the annual consumer price index climbing to 3.5% in April. Although much of the increase was attributed to seasonal factors such as higher road tax and airfares the reading was sufficient to dampen expectations of a rate cut in June, shifting focus toward the August meeting as a more likely window for monetary action from the Bank of England.
Elsewhere, the euro, Japanese yen, and Chinese yuan posted moderate gains, supported by the dollar’s weakness and shaped by a mix of domestic fundamentals and external pressures. In the Asia-Pacific region, the Australian dollar rebounded slightly after prior selling pressure triggered by the Reserve Bank of Australia’s dovish shift. The yuan remained relatively stable despite escalating tensions between Beijing and Washington over new U.S. restrictions on China’s semiconductor sector.
In a precautionary move to assess systemic risks, the European Central Bank has initiated a review of eurozone banks’ exposure to the U.S. dollar. This comes amid growing concerns about potential disruptions in global funding markets, especially given the lingering uncertainty surrounding the Federal Reserve’s commitment to backstopping foreign institutions during periods of liquidity stress.
President Trump’s remarks casting doubt on the independence of the Federal Reserve have only added to the ECB’s apprehension. Nevertheless, ECB Vice President Luis de Guindos expressed confidence in the continued cooperation between the Fed and major central banks through dollar swap lines tools that have historically served as key stabilizers during financial crises.
As for the Australian dollar, its recent decline was a direct result of the Reserve Bank of Australia’s shift toward a more dovish policy stance, with lowered projections for both economic growth and inflation. According to UBS, the RBA is expected to deliver two more 25 basis point cuts in August and November, bringing the terminal rate to 3.35%. However, UBS analysts warn that market pricing may have overreacted to this dovish pivot, arguing that the recent depreciation in the AUD does not fully reflect the underlying fundamentals.
Broadly across Asia, most regional currencies traded higher led by the South Korean won and Japanese yen despite soft trade data out of Tokyo and heightened U.S. China trade tensions. With both political and economic headwinds remaining persistent, currency movements are likely to stay heavily influenced by geopolitical developments and central bank signals, with markets cautiously watching for any shifts in global monetary rhetoric.
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