The dollar index fell to around 99.4 on Friday and was set to lose more than 1% for the week, weighed down by mounting concerns over the US fiscal outlook.
Dollar heads to sharp weekly decline
President Trump’s new budget bill, which includes significant tax cuts and increased defense spending, has intensified worries that it could further inflate the already substantial US national debt. According to estimates from the Congressional Budget Office, the bill is projected to add nearly $4 trillion to the national debt over the next decade, fueling fears about long-term fiscal instability and the sustainability of government finances.
These concerns were compounded by Moody’s recent downgrade of the US credit rating from its top-tier Aaa to Aa1, marking a rare step that reflects growing unease over ballooning deficits and the escalating cost of servicing federal debt. The downgrade has sent shockwaves through financial markets, shaking investor confidence in the safety of US government bonds and weighing heavily on the greenback.
In addition to fiscal pressures, the dollar faced further headwinds from the lack of progress in ongoing trade negotiations, particularly between the US and China. This stalemate has prompted investors to reduce exposure to US assets amid fears that unresolved trade tensions could dampen economic growth and corporate earnings. The combination of fiscal uncertainty and trade-related risks has led to increased demand for alternative currencies and safe-haven assets.
Silver lining on the diplomatic front
However, there was a silver lining on the diplomatic front. China’s Foreign Ministry confirmed that Washington and Beijing have agreed to maintain open lines of communication, following a phone call between Chinese Vice Foreign Minister Ma Zhaoxu and US Deputy Secretary of State Kurt Campbell. This commitment to continued dialogue was welcomed by markets as a positive step toward easing trade tensions and avoiding further escalation, helping to moderate some of the dollar’s losses.
Overall, the dollar’s recent weakness reflects a complex mix of fiscal, geopolitical, and trade-related factors. While short-term volatility may persist, the trajectory of US fiscal policy and progress in trade negotiations will remain key drivers of the dollar’s outlook in the weeks ahead.
