The Bloomberg Dollar Spot Index fell 1% on Wednesday to its weakest level since November. That was the biggest drop for the index since January 20, Inauguration Day. The euro was among the best performers against the greenback as Germany unveiled plans to boost defense and infrastructure investments, rising close to $1.08, a level last seen in November.
“The dollar adjustment continues at a rapid rate as the market prices the impact of tariffs squarely on the US, via growth impact, and not on the countries being tariffed,” said Brad Bechtel, the global head of FX at Jefferies. “We are in the midst of the downswing now and its unclear how far it can run.”
The dollar has been on a downward trend this week as the US put into force trade tariffs on Canada and Mexico, fueling concern that a global trade war will weigh on economic growth and force major central banks to cut interest rates further. Markets now price more monetary easing from the Federal Reserve by the end of the year, compared to Friday.
Nearly all currencies in the Group of 10 advanced against the greenback. The Canadian dollar lagged many peers, advancing 0.4% after the White House said the US is exempting automakers from newly imposed tariffs on Mexico and Canada for one month.
“The US economy could slow down further and force the Fed to resume its easing cycle in the second half of the year,” said Valentin Marinov, head of global FX strategy at Credit Agricole CIB. “The Fed may also have to put an end to its quantitative tightening program to accommodate US President Donald Trump’s fiscal spending plans. This could erode the USD exceptionalism.”
At the same time, moves in Washington to decrease its defense presence in Europe have prompted leaders in the region to beef up its military capabilities. Germany plans to unlock hundreds of billions of euros for defense and infrastructure investments in a dramatic shift that sent the euro surging and the nation’s bonds slumping.
Meanwhile, US service providers expanded last month at a faster pace as resilient demand helped drive a measure of employment to a more than three-year high. The Institute for Supply Management’s gauge of services advanced to 53.5 from 52.8 a month earlier, according to data released Wednesday
“The developments in Europe was significantly positive for the euro but for it to be sustainable, we need to see a material slowdown in US economic activity,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, US. “Today’s ISM services throws some cold water on the bullish euro environment.”
While the greenback is often considered as the safest of global currencies due to its liquidity and political stability, Deutsche Bank AG has put that into question. The bank’s global head of FX strategy George Saravelos said the currency may lose its traditional safe-haven status as global markets adjust to a new geopolitical order.
“The strong recovery in the euro suggests that Europe’s star is rising, as the dollar continues to lose its luster,” said Kathleen Brooks, research director at XTB.
