Dollar Falls on New Trump Fed Attacks

The dollar has fallen 9.6% this year against a basket of currencies. (Arun Sankar / AFP / Getty Images)

The dollar has been a punching bag this year. Its weakness is likely to continue, but the source of the hits may be changing.

The Federal Reserve is now driving the dollar’s level, strategists say, since the central bank is expected to resume interest rate cuts next month. A coming process to replace Fed Chair Jerome Powell when his term expires next May has amplified concerns about Fed independence.

“I think we have a trend change. It was very abrupt,” said Jens Nordvig, founder and CEO of Exante Data. The euro has gained 13% against the dollar this year. That kind of rapid move is “pretty rare,” Nordvig said.

He expects the dollar will continue to weaken. “I think it’s going to be more gradual from here.”

Abrupt changes to tariff policy have been one of the main forces prompting the dollar selloff. President Donald Trump’s Liberation Day announcement April 2 rattled investors around the globe. That caused foreign investors to shift some investments away from dollars and more seriously hedge their U.S. holdings.

Inflation fears have subsided as the White House has rolled out trade deals. Markets steadied.

The dollar continued to weaken, however.

“I think the first part of the year was the tariffs, the Trump administration talking the dollar down, the reallocation-type stories,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

The Fed has signaled its rate setting committee expects to cut rates by a quarter-point twice this year. “I think as we get closer to the Fed cut, and other central banks are pausing, that just causes more pressure on the dollar,” Chandler said.

Chandler said he expects the dollar to decline about 5% further this year. Were the Fed to cut aggressively, the dollar could fall by as much as another by as much as another 10%.

The dollar index fell a tenth of a percent on Wednesday morning after Trump called for the resignation of Fed Governor Lisa Cook. The dollar has fallen 9.5% so far this year.

The euro could weaken against the dollar if traders judge that ongoing diplomacy this week over Ukriane’s fate isn’t constructive.

Meanwhile, Fed Chair Jerome Powell is set to speak Friday at the Fed’s annual symposium in Jackson Hole, Wyo. He is expected to use the speech as an opportunity to defend Fed policy to keep rates on hold as the central bank weighs the labor market and inflation data.

President Donald Trump has repeatedly criticized Powell for not cutting interest rates.

The Trump administration has said current interest rates are making debt payments unnecessarily expensive. Treasury Secretary Scott Bessent said last week economic conditions warrant a half-point rate cut at the Fed’s next meeting.

The marking is pricing on a quarter-count cut instead when the Fed meets on Sept. 17—to a federal funds rate range of 4% to 4.25%.

“I think the scenario in which the dollar enters into a new phase—that is also weakness but for slightly different reasons—would be one where the labor market stays very weak,” said Nordvig. “The Fed either is OK with the tariff impact on inflation or says, OK, the economy is so weak that we just have to respond to the second part of our mandate, the unemployment rate.”

Jobs data for July signaled the labor market could be seeing a significant slowdown in hiring. Just 73,000 jobs were added, and prior months’ gains were reduced by 238,000 jobs. That may prompt the Fed to decide that a weaker labor market is a reason to cut rates.

Nordvig’s firm tracks money flows in and out of markets around the world. He expects that the move from U.S. assets has peaked for now. He said the biggest flows from U.S. equities from Europe was around April, while the bigger flows from Asia were in June.

Created with Highcharts 9.0.1Reallocation Away From U.S. Equities May Be ReversingThe Eurozone and Asia pulled back from U.S. equities this spring.Country flows to U.S. equities by regionSource: Exante Data, EPFRNote: Asia region includes Japan, Taiwan, Australia, and Korea.

Created with Highcharts 9.0.1Aug. 2024'25-10-505101520253035%EurozoneAsia

Foreign investors increased holdings of U.S. stocks at a strong pace in June, Treasury International Capital data released Friday shows. There was a small net inflow into U.S. government bonds by private investors but a net outflow from official holders, such as central banks.

“It doesn’t mean [the reallocation] is finished. I think the focus is shifting to Fed independence, these other drivers of the dollar, rather than people having to change their hedges,” Nordvig said.

Trump has backed away from earlier threats to remove Powell, which has eased market anxiety. Bessent has said there are now about 10 or 11 candidates under consideration.

The White House has nominated Stephen Miran, currently chair of the White House Council of Economic Advisers, to a short-term seat that will be open through the end of January. Miran in a paper for his former employer, Hudson Bay Capital, called for a weaker dollar, claiming a higher dollar is at the heart of economic imbalances.

Nordvig, who knows Bessent from his days as a hedge fund manager, said the Treasury Secretary doesn’t want to “rock the markets” and could have some “implicit influence on the Fed while still appointing somebody who would be less risky, less volatility inducing.”

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