Dollar hovers at near three-year low

The US Dollar Index (DXY) held around 96.6 on Wednesday, lingering at its lowest level in nearly three and a half years, as a combination of dovish Federal Reserve expectations and intensifying concerns over President Donald Trump’s expansive fiscal agenda continued to exert downward pressure on the greenback.

The weakening dollar underscores growing market skepticism around the sustainability of US fiscal and monetary trajectories, especially in the face of persistent inflationary pressures and widening budget deficits.

Speaking on Tuesday, Federal Reserve Chair Jerome Powell reiterated the central bank’s patient stance on monetary policy, stating that while the Fed is not in a hurry to cut rates, a reduction has not been ruled out at the upcoming policy meeting later this month.

Powell emphasized that the Fed’s actions would remain data-dependent, particularly as inflation shows signs of moderation. Notably, he pointed out that the Federal Reserve might have already moved to lower interest rates were it not for the lingering inflationary effects of President Trump’s tariffs, which have kept price pressures slightly elevated despite cooling economic activity.

Simultaneously, fiscal risks re-emerged at the forefront of investor concerns after the Senate narrowly passed Trump’s sweeping tax-and-spending legislation, which now heads back to the House for final approval. The bill, which includes large-scale corporate tax cuts and increased federal outlays, is projected to add $3.3 trillion to the national debt over the next decade.

This aggressive fiscal stance, combined with slowing revenue growth and rising entitlement costs, has raised alarms over the long-term sustainability of US debt, contributing to a flight from dollar-denominated assets.

The weakening dollar also reflects shifting expectations around the interest rate differential between the US and other major economies. As global central banks begin to recalibrate policy in response to slowing growth and subdued inflation, the narrowing yield gap has made the dollar less attractive relative to other currencies, such as the euro and yen.

Looking ahead, investor attention is turning to the release of key labor market data, which could prove pivotal in shaping the Fed’s near-term policy path. The ADP private-sector employment report, due later Wednesday, and the official June nonfarm payrolls report, scheduled for Thursday, will be scrutinized for signs of softening in hiring and wage growth. Any downside surprises could reinforce market expectations of a rate cut, potentially amplifying downward pressure on the dollar.

In summary, the US dollar remains caught between monetary caution, fiscal expansion, and geopolitical uncertainty. As policymakers navigate this increasingly complex landscape, currency markets are likely to remain volatile, with the DXY’s current lows serving as a barometer of investor unease with Washington’s economic direction.