U.S. Dollar Nears 3.5-Year Low as Traders Anticipate Rate Cuts

The U.S. dollar remains close to its lowest point in three and a half years against both the euro and the pound as traders bet on potential rate cuts by the Federal Reserve. This comes as the market waits for trade agreements ahead of a looming July deadline for President Donald Trump’s tariffs.

In early European trading, the euro received a slight boost following new data indicating that French consumer prices rose more than anticipated in June. By 0808 GMT, the euro had gained 0.2%, trading at $1.17208, just shy of the $1.1745 it reached in the previous session, marking its highest level since September 2021. Meanwhile, the pound was priced at $1.3742, hovering just below its October 2021 peak of $1.37701 reached on Thursday.

As the geopolitical tensions stemming from the Israel-Iran conflict recede following a seemingly stable ceasefire, market attention has shifted toward U.S. monetary policy. Speculation has arisen that Trump may announce a new Federal Reserve chair earlier than expected, with expectations that the successor will be more dovish, undermining the current chair, Jerome Powell. This development has increased the likelihood of the central bank implementing rate cuts.

Powell, whose term is set to conclude in May, was perceived as adopting a more dovish stance during his recent testimony to Congress, further fueling expectations for rate reductions. Traders are now pricing in approximately 64 basis points of easing this year, an increase from the 46 basis points anticipated on Friday.

“The sooner a replacement is named for Powell, the sooner he could be viewed as a ‘lame duck’,” noted Carol Kong, a currency strategist at the Commonwealth Bank of Australia. However, according to a source familiar with White House discussions, Trump has yet to make a decision regarding Powell’s replacement, and an announcement is not expected soon.

“For the time being, the anticipation that President Trump will select a more dovish chair will continue to exert downward pressure on Federal Open Market Committee (FOMC) pricing and the dollar,” Kong added.

Trump has consistently criticized Powell and called for rate cuts this year, raising concerns among investors regarding the diminishing independence and credibility of the U.S. central bank. The dollar index, which measures the U.S. currency against six others, lingered near its lowest level since March 2022 at 97.159, heading for a 2.3% decline in June, marking its sixth consecutive month in the red. The index has fallen over 10% in 2023 as Trump’s tariffs amplify concerns about U.S. economic growth, prompting investors to seek alternatives.

The yen remained stable at 144.375 per dollar, while the Swiss franc traded at 0.799 per dollar, close to its strongest level in a decade. Traders are looking forward to the release of the core Personal Consumption Expenditures (PCE) price index in the U.S. on Friday, which could provide further insight into the Fed’s rate path. “The prevailing narrative is leaning toward more rate cuts, and a lower PCE print could accelerate this trend, but expectations are already quite subdued,” commented Michael Pfister, an FX analyst at Commerzbank.

Investors are also eager for updates on new trade agreements ahead of the July 9 deadline for Trump’s “reciprocal” tariffs, as countries rush to finalize deals. German Chancellor Friedrich Merz suggested on Thursday that the EU should pursue a “quick and simple” trade deal with the U.S. rather than a “slow and complicated” one. Additionally, a White House official confirmed that the U.S. has reached an agreement with China to expedite shipments of rare earth materials to the United States.

Emerging market currencies have also benefited from the weakened U.S. dollar, with the Taiwan dollar rising to its strongest level since April 2022.