The US dollar index dipped below 100 on Monday, paring last week's gains as investors grew increasingly cautious and sought greater clarity on the trajectory of US-China trade relations.
Dollar slips on lingering trade concerns
The greenback came under pressure as risk sentiment improved modestly and traders rebalanced positions ahead of a pivotal week for monetary policy and geopolitical developments. On Sunday, President Donald Trump reiterated that he believed China was interested in reaching a trade agreement, but he offered no specifics or timeline, adding to the ambiguity that has characterized recent negotiations. Meanwhile, Beijing has signaled it may consider restarting trade talks, but made it clear that any dialogue would be contingent upon the US removing all unilateral tariffs, which it views as a prerequisite for restoring trust and demonstrating goodwill.
Trade war caused market volatility
The lack of concrete progress in trade discussions has contributed to market volatility and weakened the dollar, as traders weighed the possibility that prolonged tensions could weigh on global growth and prompt a more accommodative policy stance from the Federal Reserve. However, investor focus is now turning to the upcoming Fed policy meeting later this week, where the central bank is widely expected to leave interest rates unchanged. Despite the uncertain trade backdrop, recent US macroeconomic data has remained solid, with a stronger-than-expected April jobs report helping to ease concerns of an imminent economic slowdown.
The resilience of the labor market, reflected in robust nonfarm payroll growth and stable wage inflation, has further reduced the likelihood of a rate cut in June. As a result, market expectations for a dovish Fed pivot have tempered significantly, with the probability of a June rate cut falling to 37%, down sharply from 64% a month earlier. Some analysts now believe the Fed may opt to maintain its current rate trajectory through the summer unless inflation weakens meaningfully or financial conditions tighten significantly.
Investors monitor global bond markets developments
In addition to Fed policy, investors are also monitoring developments in global bond markets, where narrowing yield differentials between the US and other major economies—such as the Eurozone and Japan—have reduced the dollar’s relative appeal. A softer dollar could also reflect growing expectations that other central banks, including the European Central Bank and the Bank of England, may slow or pause their easing cycles in response to recent upside surprises in inflation data.
Overall, while the dollar remains supported by relative economic strength, the interplay between trade policy uncertainty, shifting Fed expectations, and global monetary dynamics continues to shape the currency’s outlook heading into the second half of the year.
