The US dollar index fell to 100.3 on Wednesday, extending its pullback from the one-month high reached earlier this week, as growing speculation mounted that the Trump administration might be more open to a weaker dollar policy.
Dollar extends decline
The shift in sentiment followed reports that US and South Korean officials held discussions on the won/dollar exchange rate during a meeting on May 5th, triggering a sharp reaction in currency markets. The greenback dropped more than 1.5% against the Korean won following the news, reflecting concerns that the US could intensify its focus on foreign exchange practices as part of its broader trade agenda.
The Trump administration has long argued that the relative weakness of Asian currencies, including the Korean won and the Chinese yuan, has provided regional exporters with an unfair competitive advantage over their US counterparts. The recent discussions between Washington and Seoul have fueled speculation that the US may seek to formally address currency valuations in upcoming trade negotiations, potentially signaling a departure from the traditional strong-dollar policy stance.
Effects of trade war developments
At the same time, momentum from the dollar’s recent rally—which had been supported by the temporary easing of US-China trade tensions through announced tariff reductions—began to lose steam, as investors refocused their attention on the broader economic implications of the US’s aggressive trade policies. Many market participants remain cautious, viewing the tariff truce as a short-term fix rather than a lasting solution, with uncertainties lingering over the future direction of global trade flows and supply chains.
Adding further pressure on the greenback was the latest US inflation data, which came in weaker than expected, reinforcing market expectations that the Federal Reserve could still have room to lower interest rates twice before the end of the year. The soft inflation figures suggested that underlying price pressures remain subdued, despite resilience in the labor market, bolstering the argument for further policy easing should economic growth continue to moderate.
USD down against major currencies
Against this backdrop, the dollar also weakened broadly against other major currencies, including the Japanese yen and the euro, as traders sought safer havens amid renewed concerns over the global economic outlook and volatile equity markets. The yen, in particular, benefited from a fresh wave of risk aversion, while the euro found support from slightly improved economic sentiment data in the eurozone, as well as speculation that the European Central Bank may hold off on additional stimulus measures in the near term.
Looking ahead, currency markets are expected to remain highly sensitive to any developments in US foreign exchange diplomacy, as well as to upcoming economic releases that could sway expectations for Fed policy. The dollar’s near-term trajectory will likely be shaped by the interplay between domestic data, evolving trade negotiations, and geopolitical risks, with the possibility of a more explicit pivot toward a weaker dollar stance by the US administration keeping FX markets on alert.
