The US dollar has hit its largest fall in forty years, making a quick rebound difficult in the short term.

Author: Martin Bakadakis

On Thursday, the dollar fell to its lowest level in over three years, continuing one of the longest streaks of decline on record, as the "Sell America" trade accelerated among overseas investors.

The US Dollar Index, which measures the dollar against six major currencies, earlier in the session hit 97.60, the lowest intraday level since March 2022. By late morning, the dollar index was down 0.6% at 98.01.

Since the beginning of this year, the US dollar index has fallen by nearly 10%, and is expected to record its worst performance in the first half of the year in forty years.

The euro, which has the largest weight in the US dollar index, rose to its highest level since October 2021 during early trading. By mid-morning, the euro was up 0.8% at $1.1576.

This time, the decline of the US dollar is particularly noticeable, as usually, tensions in the Middle East and some progress in trade negotiations should provide support for the dollar. However, the dollar did not benefit from this; instead, it was pressured by comments from President Donald Trump and Treasury Secretary Scott Pruitt on trade issues.

On Wednesday evening, Trump told reporters that if a new agreement cannot be reached by July 9, he may impose tariffs unilaterally on U.S. trade partners "within weeks." The so-called "reciprocal tariffs" suspension measures he announced on April 2 will expire on that day.

At the same time, Besant stated that he supports Section 899 of the Republican tax and spending bill, which would impose an additional tax of up to 20% on foreign investments from countries deemed to have unfair or discriminatory tax policies.

Bessent stated in the House Fundraising Committee that, although he believes the bill known as "retaliatory taxes" is accompanied by a lot of "false information," it will still enable the U.S. to "prevent our corporate revenues from flowing into foreign treasuries."

This week, after two days of intense negotiations in London, the United States and China reached a preliminary trade agreement; however, the exchange rate of the US dollar has declined as a result. This outcome is quite unusual, as positive trade results typically promote economic growth in the United States, thereby attracting foreign investors.

George W. Veysey, chief foreign exchange and macro strategist at Convera Payment Platform Group, stated: "The US dollar remains a key indicator of trade sentiment, and it is significant that the dollar has not risen further after the so-called agreement with China. The market remains cautious, waiting for clearer signals to determine whether tariff adjustments will actually take place or if they are merely a bargaining chip."

Multiple media outlets have reported that Israel is preparing to launch a military strike against Iran. This news has driven up global oil prices, but it has still not prompted a flow of funds into the previously depreciated dollar, and there has been no so-called "safe-haven buying."

At the same time, there are signs that tariff-related inflation is not as severe as expected, which has raised market expectations for a potential rate cut by the Federal Reserve. The consumer price index for May released on Wednesday rose less than expected, while the producer price index released on Thursday showed that inflationary pressures have eased.

The expectation of interest rate cuts has pushed up bond prices and lowered their yields. This usually depresses the value of the dollar in the foreign exchange market, as the yield gap between U.S. investments and those in economies like Europe or Japan narrows.

In fact, Federal Reserve data shows that since April, foreign holdings of U.S. Treasuries have decreased by about $20 billion, a decline of about 27% over the past four years. However, a recent report from American Bank indicates that investors are flocking to dollar-denominated assets outside of the Treasury market.

Nonetheless, Chris Turner, global head of markets at ING, believes that the dollar will continue to face further weakness in the future.

"While we do not believe that the dollar will collapse, we do think that there are currently enough adverse factors that will keep the dollar under pressure for the remainder of this year," he stated in a report released on Thursday.