On Thursday, May 15th, during the European trading session, the dollar weakened globally as investor optimism over a temporary US-China tariff truce quickly cooled. A series of weak economic data and bets on Federal Reserve rate cuts further dampened the dollar's appeal.
By midday, the dollar index (DXY), which measures the dollar against six major currencies, had given up most of its early week gains, standing at 100.65, a decrease of 0.14%. Market risk appetite dissipated rapidly, leading investors to turn to traditional safe-haven currencies, including the yen and Swiss franc, which strengthened.
Trade Optimism Fades, Dollar Loses Momentum
Previously, markets were buoyed by the temporary 90-day tariff suspension agreement between the US and China, with the dollar benefiting from eased risk. However, MacroHive strategist Benjamin Ford noted that the positive market reaction has been "exhausted" and new driving forces have failed to emerge.
A subsequent Bloomberg analysis clarified the dollar's trend, stating that although the US did not seek trade advantage by artificially suppressing the dollar during talks, external policy fluctuations, geopolitical risks, and decreased interest of international investors in US assets continue to put pressure on the dollar.
AXA Investment Research reiterated its bearish outlook on the dollar, suggesting that as global capital moves back into Europe, Asia, and emerging markets, US assets are gradually losing their allure.
Fed's Hawkish Stance Fails to Support Dollar
Federal Reserve Chairman Powell delivered a key speech emphasizing that changes in the current economic structure mean facing more frequent supply shocks, which might keep long-term rates relatively high. He pointed out that even if long-term inflation expectations remain anchored at 2%, the era of near-zero interest rate policies is over.
Despite the hawkish tone, Powell did not provide a clear signal for rate cuts, a cautious approach that did not effectively support the dollar. On the contrary, the market interpreted it as highlighting the Fed's dilemma between inflation and employment, intensifying expectations of a policy shift within the year.
Weak PPI and Soft Consumer Data Fuel Rate Cut Bets
The US Producer Price Index (PPI) for April unexpectedly fell by 0.5%, far below the anticipated 0.3% increase, marking the largest drop in service prices since 2009. Core PPI also decreased by 0.4%, indicating a significant decline in inflation momentum.
Meanwhile, retail sales in April grew only 0.1%, aligning with market expectations but a sharp drop from March's 1.7% strong growth. This series of economic signals has strengthened market predictions that the Fed may cut rates twice this year, with the first cut possibly as early as October.
The weak data also weighed on US Treasury yields, with the 10-year yield dropping more than 5 basis points to 4.477%, further reducing the dollar's return appeal.
Dollar Still in Volatile Range, Short-Term Pressure Likely
Overall, the dollar is currently facing multiple adverse factors: trade policy uncertainty weakening risk appetite, persistently weak inflation data increasing rate cut expectations, and a steady Fed stance that has not provided effective support. As risk aversion sentiment rises, the market may continue to gravitate towards low-risk currencies in the short term, maintaining downward pressure on the dollar unless more decisive positive economic or policy signals emerge.
