The US dollar continued to weaken on Tuesday, with the dollar index trading around 98.4, just above its lowest level in three years. This comes after a series of political and economic developments raised serious concerns about the Federal Reserve's independence and the broader outlook for US monetary policy.

Trump’s Remarks Add Fuel to the Dollar’s Decline

The downward pressure on the dollar intensified after former President Donald Trump publicly criticised Federal Reserve Chair Jerome Powell, labeling him indecisive and urging the central bank to cut interest rates immediately. Trump accused Powell of being too slow in reacting to the economic risks posed by the ongoing global tariff war and suggested that his leadership may need to be reassessed.

While Powell has maintained a cautious stance—preferring to wait for inflation data and the economic impact of tariffs before making rate decisions—Trump’s comments have been perceived as a direct threat to the independence of the Federal Reserve.

The White House’s hint at removing Powell added further fuel to investor anxiety, raising questions about whether the US central bank can act free from political interference.

Investor Confidence in the Fed Erodes

The Federal Reserve’s credibility is a cornerstone of global economic stability. Any indication that the Fed is losing its independence can:

• Undermine global investor confidence in US monetary policy

• Spark capital outflows from US assets

• Trigger volatility across currency, bond, and equity markets

This erosion in trust has led many traders to move away from the US dollar, traditionally viewed as a safe-haven asset during periods of uncertainty. Ironically, it is now the source of that uncertainty.

Global Trade War Escalates

The lack of progress in US-China trade talks added to the bearish sentiment around the dollar. On Monday, China accused the US of tariff abuse, stating that Washington was strong-arming smaller economies into unfair trade deals.

Markets had been hoping for some thawing of trade tensions, but the rhetoric on both sides appears to be hardening. This creates a highly unpredictable environment for currency markets, as trade wars impact:

• Export competitiveness

• Capital flows

• Corporate earnings

• Inflationary pressures

In this context, investors have been increasingly shifting toward currencies seen as more stable, including the euro, Japanese yen, and Swiss franc.

Sharp Decline in the Dollar’s Value

The dollar index, which tracks the greenback against a basket of six major currencies, has now dropped nearly 6% this month. The largest losses have been observed against:

• Euro: Strengthening amid more stable EU policy expectations

• Yen: Benefiting from safe-haven inflows during global uncertainty

• Swiss franc: Historically seen as a hedge against systemic risks

Currency strategists note that this is the steepest monthly decline for the dollar since 2020, during the early stages of the pandemic.

Broader Market Implications

A weak dollar typically has mixed implications for global markets:

• US exporters may benefit from more competitive pricing abroad.

• Emerging markets with dollar-denominated debt could face increased repayment burdens if volatility continues.

• Commodities, which are priced in dollars, may see price increases, especially gold and oil.

However, the speed and scale of the decline suggest more than just routine market correction—it signals deeper macro instability.

Central Banks and Traders React

Central banks across the globe, especially in Asia and Europe, are closely monitoring the dollar's movement. Some, like the European Central Bank, may face pressure to adjust their own monetary stance if the euro appreciates too quickly.

Foreign exchange traders, meanwhile, are increasing hedging activities and reducing exposure to dollar-denominated assets, at least until more clarity emerges on:

• The Fed’s next steps

• Trump’s influence on monetary policy

• Progress in international trade diplomacy

Analyst Commentary

According to Citibank, the dollar's rapid decline may continue if political pressure on the Fed increases.
Barclays noted that the politicisation of the Federal Reserve is now the top concern among currency traders.
UBS stated that risk sentiment has shifted away from US assets, especially with uncertain leadership signals.

The dollar's current slump represents more than just market jitters—it reflects deep-rooted fears about the credibility of US institutions and the direction of economic policy. With ongoing trade disputes and domestic political pressure on the Federal Reserve, the greenback could remain under pressure for the foreseeable future.

Investors are advised to watch for:

• Comments from Fed officials

• Trade-related announcements

• Movements in rival currencies

Until there is greater certainty and stability, the US dollar may struggle to regain investor trust.

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