Trade Tensions Pressure Greenback
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, extended its losses for the second successive session and traded around 98.80 during European hours on Wednesday.
The Greenback faced challenges due to the increased likelihood of further rate cuts by the Federal Reserve (Fed) in 2025. According to the CME FedWatch Tool, markets are now pricing in nearly a 96% chance of a Fed rate cut in October and a 95% possibility of another reduction in December.
The dovish sentiment surrounding the Fed’s policy outlook put additional downward pressure on the USD. Fed Chair Jerome Powell stated that the central bank is on track to deliver another quarter-point interest-rate reduction later this month, even as a government shutdown significantly reduces its read on the economy. Powell highlighted the low pace of hiring and noted that it may weaken further.
Meanwhile, Boston Fed President Susan Collins emphasized that policy is not on a preset path; some scenarios would keep rates steady, and policy would remain restrictive even with more easing.
The US Dollar also came under pressure as traders adopted caution amid renewed trade tensions between the United States and China, the world’s two largest economies. The President of the United States criticized China on Wednesday for its recent protectionist trade policies, threatening additional targeted trade restrictions if China proceeds with imposing new rare earth mineral export controls and increased port fees for foreign container ships in Chinese ports.
The United States and China decided to charge additional port fees on ocean shipping companies transporting goods ranging from holiday toys to crude oil. The United States is scheduled to start collecting fees on Tuesday. China also began collecting special taxes on US-owned, operated, built, or flagged vessels, while exempting Chinese-built ships from the levies.
The combination of dovish Fed expectations, weak domestic indicators, and escalating trade tensions with China has pushed the US Dollar Index below the key 99.00 level. With markets already pricing in two more rate cuts by year-end, the downward pressure on the Dollar is likely to persist, potentially driving investors toward safe-haven assets such as gold and the Japanese yen.