The U.S. dollar has dropped 9.6% this year against a basket of major currencies, and analysts say more declines are on the way. What started as a reaction to trade tensions and tariff shocks is now being driven by the Federal Reserve’s plans to cut interest rates and political uncertainty about who will lead the Fed next year.
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Fed Plans Spark Dollar Pressure
The Federal Reserve has signaled that it could cut rates by a quarter-point twice this year, with the first move expected in September. Lower rates make U.S. assets less attractive to investors because they reduce the returns on government bonds and other dollar-based investments.
As Marc Chandler, chief market strategist at Bannockburn Global Forex, explained: “As we get closer to the Fed cut and other central banks are pausing, that just causes more pressure on the dollar.” He predicts another 5% drop in the dollar this year and said deeper cuts could push losses as high as 10%.
Political Tensions Fuel Concerns Over Fed Independence
Investors are also watching the politics. Fed Chair Jerome Powell’s term expires next May, and the White House has already floated replacement names. President Trump has publicly pressured Powell to cut rates, arguing that current levels make U.S. debt payments too expensive.
This raises concerns about Fed independence—the idea that the central bank should make decisions based on economic data rather than politics. As Jens Nordvig, CEO of Exante Data, put it: “I think the focus is shifting to Fed independence, these other drivers of the dollar, rather than people having to change their hedges.”
Dollar’s Decline Began with Tariffs
Earlier this year, the dollar slid after abrupt tariff announcements. Trump’s Liberation Day tariffs on April 2 rattled global markets and pushed foreign investors to shift money away from U.S. assets. That weakness carried through the spring even as inflation fears eased and new trade deals steadied the outlook.
The euro has been one of the main winners, climbing 13% against the dollar this year. Nordvig described the move as “abrupt” and said such rapid swings are rare, though he expects further weakness will be “more gradual from here.”
Weak Jobs Data Strengthens Case for Cuts
Economic data has added to the pressure. July saw just 73,000 jobs added, while earlier months were revised lower by 238,000. That slowdown in hiring could push the Fed to act sooner. A weaker labor market gives the central bank a stronger reason to cut rates in order to support growth.
Treasury Secretary Scott Bessent has already said he favors a half-point cut at the Fed’s next meeting. Markets, however, are currently pricing in a smaller quarter-point cut to bring the federal funds rate down to a range of 4% to 4.25%.
Foreign Flows Show Mixed Picture
Nordvig’s firm tracks global money flows, and he noted that the biggest moves out of U.S. equities happened in the spring. Recently, there have been some signs of stabilization. Treasury data shows foreign investors increased U.S. stock holdings in June, while private buyers added to government bonds. Still, central banks as official holders were net sellers.
For now, the dollar remains under pressure from both economic forces and politics. Traders will be closely watching Powell’s upcoming speech at Jackson Hole to see if he pushes back against criticism and reasserts the Fed’s independence.
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