Dollar weakens as ‘confidence in US assets continues to erode’
The US dollar’s traditional safe-haven status has continued to take a bruising, as investors shun the currency amid rising global tensions.
The dollar index (DXY) – which tracks the dollar’s value against a basket of currencies – has tumbled to around 98, compared to nearly 110 at the beginning of the year, as the currency plunged to a 30-year low.
Investors shun dollar amid geopolitical tensions
“A clear divergence is taking shape,” Antonio Ruggiero, senior FX & Macro Strategist at Convera said.
“This underscores how sentiment toward the US economy is acting as a stronger drag than what has historically been a dollar-positive force—higher oil prices, especially in periods of geopolitical risk. The result? Renewed selling pressure as confidence in US assets continues to erode.”
The intensifying conflict in the Middle East has exposed the dollar’s waning status as traditional safe-haven assets like gold rallied.
The dollar would traditionally be expected to rally in times of crisis, as investors flocked to safe havens. The DXY surged over 20 per cent from July 2008 to March 2009, amid the global financial turmoil.
George Vessey, macro strategist at Convera, said: “The dollar’s failure to hold safe-haven demand, despite deepening Israel-Iran tensions, underscores shifting Fed expectations and crowded USD positioning.”
The dollar’s downturn has been pegged to Trump’s ‘Liberation Day’ trade offensive that imposed sweeping levies on the US trading partners.
Other currencies rallied on the back of the weakened dollar as the Euro rose five per cent in the week following the tariff announcement.
Analysts have warned “dedollarisation” – where the currency’s influence on other economies shrinks – has become a possible reality as the dollar’s woes deepened.
Robert Farago, head of strategic asset allocation at Hargreaves Lansdown, said: “The role of the US dollar seems secure. But the new administration is pursuing policies that could undermine this stability.”
Federal Reserve should hold interest rates
Ruggiero said the dollar’s “only meaningful support for now” would be if the Federal Reserve held interest rates at the current levels.
However, the Fed faces a difficult political balancing act during its next decision on June 18, following the heavy-handed intervention of President Donald Trump, who has attempted to influence the central bank’s decision.
Trump has repeatedly hounded Fed Chair Jerome Powell to take the axe to rates, branding Powell a “major loser”.
He renewed his attacks earlier this month after fresh data showed a dire picture of the health in the US economy.
“The Fed remains highly cautious about tariff-related inflation, prioritising it over growth concerns, with softer prints keeping a firmly dovish shift at bay,” Ruggiero said.
Nearly 99 per cent of analysts expect the Fed to hold rates at 4.25 to 4.5 per cent in the coming meeting.
The next anticipated cut is the September meeting, where over half of analysts expect a reduction to four to 4.25 per cent, according to data from the London Stock Exchange Group.