US dollar dips as recession fears rise from escalating global tariff war

The US dollar index dropped toward 102.5 on Monday, continuing a downtrend sparked by growing fears of a recession due to President Donald Trump’s intensifying trade war. Despite mounting market volatility and global retaliation, the White House maintained its stance on reciprocal tariffs, further unsettling investors.

The weakening dollar reflects a shift in global sentiment, as traders and financial institutions flee toward safer currencies and start to price in aggressive monetary easing from the Federal Reserve.

Trump's firm stance on tariffs spooks investors

President Trump, speaking on Sunday, reinforced his support for sweeping tariffs, stating that “sometimes you have to take a medicine to fix something.” The remark suggested that the administration is willing to endure short-term economic pain for what it sees as long-term strategic gains.

This tough talk came just two days after China announced a 34% tariff on all US imports, a retaliatory move that could be mirrored by other major economies such as Canada and the European Union, who have hinted at following China's lead.

The escalating trade war has alarmed economists and investors, many of whom now believe that the resulting disruption to global trade could plunge the US into stagflation—a combination of high inflation and low growth.

Dollar index falls as safe havens attract buyers

The US dollar index, which tracks the greenback against a basket of major global currencies, slid toward 102.5, down significantly from recent highs. At the same time:

• The Japanese yen and Swiss franc, both traditional safe-haven currencies, strengthened significantly against the dollar

• The euro also gained as European investors distanced themselves from dollar-denominated assets

• However, the dollar rose against the Australian and New Zealand dollars, which tend to fall during risk-off market sentiment

This mixed performance underscores the polarisation of global currencies in response to geopolitical and economic uncertainty.

Federal Reserve outlook shifts drastically

The combination of rising inflation expectations and slowing economic activity is clouding the outlook for Federal Reserve policy. Investors are now fully pricing in 100 basis points (1%) of rate cuts by the end of 2025. Such a scenario would mark a major shift from the earlier Fed posture, which had been focused on inflation control through tighter rates.

If the economy continues to slow and market pressure mounts, the Fed may be forced into a dovish pivot, cutting rates faster than previously anticipated. Lower interest rates would make the US dollar less attractive to global investors, potentially accelerating its decline.

Global markets react

The dollar's weakness is just one piece of a much larger puzzle. Across the world:

• Stock markets are in retreat, with major indices showing signs of bear-market territory

• Commodities like oil and copper have declined, reflecting lower demand expectations

• Bond markets are rallying, especially in safe-haven economies, as investors seek shelter

This broader movement reinforces fears of a synchronised global economic slowdown, with the US dollar—once seen as a fortress of strength—now appearing vulnerable.

Implications for trade and consumers

The falling dollar could have mixed consequences for the US economy. On one hand, a weaker dollar makes US exports cheaper and more competitive globally. On the other hand, it also means:

• Imported goods become more expensive, driving consumer inflation

• Foreign investors may pull capital out of US markets, reducing liquidity

• Travel and international purchases become more costly for American consumers

All of this puts additional strain on the average American household, especially amid rising food and energy prices.

Outlook for the US dollar

Currency analysts are closely watching the situation, with many forecasting continued downward pressure on the dollar unless a diplomatic resolution to the trade war emerges. In the absence of such a breakthrough, they warn that the dollar index could fall below 100 in the coming months, especially if:

• The Fed accelerates rate cuts

• Global retaliation intensifies

• Recession indicators become more pronounced

While the dollar’s long-term strength is underpinned by the US’s global economic role, its short-term trajectory looks increasingly bearish.

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