In the early European trading session on Thursday, the US Dollar Index faced downward pressure, slipping below the key 103.00 mark to around 102.70. This decline marks the third consecutive day the index has traded in negative territory, with a 0.28% drop on the day.
Recession Fears Send Dollar Lower
Investor concerns about a potential US recession are casting a shadow over the dollar. The ongoing trade tensions, particularly the actions of President Donald Trump, have added to the market’s unease. Trump’s decision to escalate the trade war with China while pausing tariffs on many other countries for 90 days has left investors jittery. Analyst Kyle Rodda from capital.com noted that the president’s actions suggest he may be reacting to signs of a possible economic slowdown, including a potential recession, political pushback, a near-bear market in equities, and early warning signs of a financial crisis. This has led to a loss of confidence in the US government among investors.
Fed’s Caution and Uncertainty
Minutes from the Federal Reserve’s March meeting revealed that Fed officials are cautious about the inflation outlook. They acknowledged that inflation could be more persistent than expected, largely due to the high degree of uncertainty surrounding Trump’s tariffs. This uncertainty has also raised red flags about a potential economic downturn in the US. Minneapolis Fed President Neel Kashkari warned on Wednesday night that continued economic uncertainty could push the US economy into a slump. Cleveland Fed President Beth Hammack also adopted a cautious stance on interest rate forecasts, highlighting that the uncertainty in US trade policy will make it challenging for the central bank to conduct market – stabilizing operations.
Traders Betting on Rate Cuts
In recent weeks, traders have significantly adjusted their expectations regarding the Fed’s monetary policy. According to the CME FedWatch tool, derivatives markets now indicate a 44% probability that the Fed will cut interest rates at its next meeting on May 6 – 7. This is a substantial increase from just 14% a week ago.
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