The Dollar Slides Again – But This Time, the Reasons Are Multiplying

After the USD (DXY) briefly finding its footing during the height of Middle East tensions, the US dollar has now decisively resumed its 2025 downtrend. The latest leg lower comes as fears of inflationary flare-ups from geopolitical shocks recede, allowing markets to reprice Fed rate expectations again.

The dollar's decline this week hasn’t been quiet either: EUR/USD pushed back above 1.17, and GBP/USD climbed toward 1.37, levels we haven’t consistently seen since early 2021. And it’s not just about FX spot prices yields are leading the way. The 2-year Treasury yield has fallen for five straight sessions, mirroring a market that's pivoting from “higher-for-longer” to “maybe-sooner-than-expected” when it comes to rate cuts.

This change in tone has a lot to do with Fed Chair Powell’s latest Congressional appearance. For the first time in months, Powell floated the possibility that future trade deals particularly if they help ease some of the cost pressures tied to tariffs could give the Fed room to ease again.

But let's be clear: markets are still cautious. There's only around 6bps of easing priced in for the July meeting. So, for a July cut to gain traction, we’d likely need a seriously weak nonfarm payrolls report next week. That’s the kind of data miss that could force the Fed’s hand.

Politics Enters the Chat: Trump Eyes Powell's Replacement

A separate but related tailwind for dollar weakness is now coming from politics. According to the Wall Street Journal, Trump is reportedly considering announcing a replacement for Jerome Powell by September months ahead of the official end of his term. Former Fed Governor Kevin Warsh and National Economic Council head Kevin Hassett are said to be in the running, along with names like David Malpass and Fed Governor Waller.

What matters here isn't just who might take the job it’s the message. If the nominee is seen as someone who’ll bow to political pressure and cut rates aggressively, investors could quickly start to view US monetary policy as politicised. That would add further pressure to the dollar and reinforce the recent bearish trend.

Eurozone Stands Tall: Germany Breaks the Fiscal Chains

Meanwhile, the euro has found fresh support from a very different source: German fiscal policy. For the first time in years, Berlin is loosening the purse strings in a meaningful way. Chancellor Merz’s new budget includes over €500 billion in net new borrowing through 2029. That money won’t just sit idle it’s being channelled into public investment, infrastructure, and defence.

This fiscal shift means yields in Germany (and the euro area more broadly) are holding up, even as US yields drop. That widens the spread in the euro's favour. Stronger IFO data this week added fuel to the move, showing growing business confidence in Germany. The forward-looking expectations index hit its highest level in over two years.

What’s also helping the euro is a rising belief that Europe might dodge the worst of Trump’s tariff plans at least for now. While the risk of a 20% or 50% “reciprocal tariff” rate hitting EU goods still looms for the July 9th deadline, speculation is building around possible trade deals or a deadline extension. That would be a clear positive for risk sentiment and for EURUSD.

What to Watch Next

• July 9: The end of the 90-day tariff delay. Any diplomatic progress or extension could shift sentiment dramatically.
• June NFP (Next Week): A weak print could push the Fed closer to a July or September cut.
• Powell’s Position: A summer announcement of a new Fed chair nominee would likely stir market volatility.

The tide is clearly turning against the US dollar again, but this time the shift feels more structural. Yields are falling, Fed credibility is under scrutiny, and global capital is beginning to seek alternatives. Meanwhile, Europe is stepping up with fiscal support just as the US heads into a politically volatile summer.

If you’ve been waiting for a deeper USD correction to re-enter long EUR or GBP trades, you may be running out of time. The momentum is shifting fast and the charts are starting to agree.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.