Dollar’s slide continues

The dollar continues to weaken as expectations for Fed rate cuts later this year continue to harden, with a Wall Street Journal report that Donald Trump may name a successor to Fed Chair Jerome Powell – whose term ends in May 2026 – earlier than usual, perhaps as soon as September, also weighing on the US currency. It has fallen to over $1.17 against the euro and to around $1.3730 against sterling, levels last seen in late 2021. The euro-pound exchange rate is little changed though, at about £0.8525, as it continues to trade in a relatively narrow range.

Expectations for Fed rate cuts over the remainder of this year have firmed during the past week, with just over 50bps of policy easing now priced in by end-2025, reflecting a combination of comments from central bank officials and some softer than expected economic data. This in turn has contributed to a notable decline in US government bond yields, with 2-year yields down around 20bps over the past week and 10-year yields about 10bps lower. In contrast, equivalent German yields are unchanged to marginally higher over this period, while UK yields are flat to marginally lower.

Having rallied quite strongly on Tuesday, European equity markets gave up a good portion of these gains in yesterday’s session, ending almost 1% lower on the day. US stocks finished little changed overall, with the S&P 500 flat and the Nasdaq chalking up modest gains of around 0.3%.

Fed member Collins says “tariff policy continues to be the main driver of the outlook for the economy in the near to medium term, with higher tariffs leading to a rise in inflation, slower output growth, and a higher unemployment rate”. She expects core PCE inflation to rise to over 3% by the end of this year (from 2.5% currently), but sees it falling back again in 2026. She supports keeping interest rates on hold for now but “expects it will be appropriate to resume” lowering them later this year.

For the day ahead, the main economic releases are in the US, including weekly jobless claims, durable goods orders, the trade balance, and a third estimate of Q1 GDP. A number of ECB, Fed and Bank of England members are scheduled to speak over the course of the day.