The US dollar is on the slide with seemingly no end in sight to the sell-off.
Investors are shying away from the world’s reserve currency as traders grow increasingly uncertain about United States’ economic policy.
From a geo-political perspective, two days of high-level talks in London between China and the US have yielded little fruit.
The talks were to resolve conflicts that had emerged since a 90-day pause was placed on US-imposed trade tariffs.
The two countries first met in Geneva, and the talks this week in London helped to wrap up those discussions.
US President Donald Trump took to his social media platform Truth Social and said: “Our deal with China is done, subject to final approval from President Xi and me.”
But officials from both sides said the London agreement would not alter the broad outlines of the May truce, which lowered — but did not eliminate — new tariffs announced by the two countries since Trump launched a new trade war earlier this year.
Financial markets are becoming somewhat numb to the ongoing trade war dramas, with the exception of currency markets.
The drawn-out trade discussions, and the lack of any binding trade deal with the US’s major trading partners, have led to an exodus out of the US dollar
“The US dollar is under renewed pressure, probing multi-year lows,” InTouch senior FX analyst Sean Callow told the ABC.
“[The US dollar] started 2025 with strong momentum as investors priced in a ‘Trump trade’ of dollar gains, backed by loose fiscal policy supporting growth and making the Fed reluctant to cut rates.
“Things started to unravel in March as Trump’s tariff campaign proved more aggressive than expected and administration officials said they were willing to tolerate a weaker economy in the short term.
“Recession fears surged on the April 2 tariff announcement, hurting the dollar’s yield support.”
This dynamic also led to an enormous US Treasury bond sell-off as global investors began to question the durability of the United States’ fiscal position.
A rapid change in perception around the Trump administration’s fiscal policy resulted in an enormous US Treasury bond sell-off. (AP: Bradley C Bower)
This pushed investors, Mr Callow said, into the euro.
“Moreover, the sell-off in long-term Treasuries raised fears of a ‘Sell America’ trade, largely benefiting the euro,” he said.
“USD weakness has helped the Aussie [dollar] push above 65 cents, reaching highs since November.”
The US Dollar Index (DXY) tracks the value of the US dollar against a basket of countries.
It hit its lowest level since January 2022 on Thursday at 97.8 at 9pm AEST.
While the US dollar’s slide is supporting the Australian dollar, it’s not created as much of an updraft for the local currency as expected.
“It is clear that the Aussie [dollar] is not investors’ preferred alternative to the US dollar,” Mr Callow said.
“In fact it is the weakest major currency so far in 2025.“
Further US dollar weakness and Australian dollar strength may depend on how currency traders view the credibility of the Trump administration’s policies.
University of Michigan professor Justin Wolfers says Donald Trump’s recent intervention in the Los Angeles riots is another sign for the financial markets that his policies are unpredictable and unorthodox.
“That this is a White House, not given to respecting the usual guardrails of civil society, [which] was clear on January 6th,” he said.
Professor Wolfers told the ABC there was a sense in the US that Trump was leading the US down a dangerous policy path.
“The sense of things fraying is, I think, very dangerous,” he said.
“There’s a deep fear among a lot of people over here.
“How far does [Trump’s interventions in state affairs] go?
“You can’t rule out anything.
“There are hushed conversations in the hallways everywhere with people saying how far does this go?
“Or maybe he does what emerging autocrats always do, which is just skate close enough, where you’re not quite sure where the law is meant to be.”
The direction of US interest rates, as determined by the US Federal Reserve, will also hold sway in terms of the direction of both the US and Australian dollars.
As for the tariff war, US Treasury Secretary Scott Bessent said he expected the US would extend the existing 90-day pause on some of its most aggressive tariffs to allow trade talks with other countries to continue.
The Australian dollar continues to trade around 65 US cents, up 4.5 per cent since the start of the year.
