The US dollar fell to a three-month low on Wednesday as concerns grew over the economic impact of recently imposed US tariffs.
Meanwhile, the euro surged as Germany announced plans for significant defense and infrastructure spending, further pressuring the greenback.
The Bloomberg Dollar Spot Index dropped as much as 0.6%, reaching its lowest level since December 9. Investors are increasingly worried that escalating trade tensions—with new US tariffs on Canada, Mexico, and China—could slow economic growth and prompt the Federal Reserve to adopt a more accommodative stance. Swaps markets now indicate expectations of 71 basis points in rate cuts by the Fed by the end of the year, up from 66 basis points last week.
“The US economy could slow down further and force the Fed to resume its easing cycle in the second half of the year,” said Valentin Marinov, head of global FX strategy at Credit Agricole CIB. “The Fed may also have to put an end to its quantitative tightening program to accommodate President Trump’s fiscal spending plans. This could erode the USD’s exceptionalism.”
The euro was one of the biggest gainers against the dollar, rising to $1.07, its highest level since November 11. The boost came after Germany’s major political parties agreed to create a 500-billion-euro infrastructure and defense fund. This move marks a significant shift in Germany’s traditionally conservative fiscal policies, leading to a rally in European markets.
Defense stocks in Europe surged on expectations of increased military spending, with shares of German companies such as Thyssenkrupp, Hensoldt, and Rheinmetall rising between 5% and 12%. The DAX index in Frankfurt jumped nearly 3%, its biggest daily gain since 2022.
The weakening dollar reflects broader concerns about the global economy, with some analysts questioning whether the currency will maintain its safe-haven status amid increasing geopolitical uncertainty. George Saravelos, global head of FX strategy at Deutsche Bank, noted that markets are adjusting to a “new geopolitical order,” which could challenge the greenback’s dominance.
“Fears about weaker US and global economic activity are manifesting in the markets,” said Kyle Rodda, senior financial markets analyst at Capital.com. “Investors are remaining cautious, and American businesses and consumers are likely feeling the same.”
In addition to currency movements, crude oil prices fell for a third consecutive session due to concerns over economic growth and potential oversupply. Brent crude futures dropped to $70.89 per barrel, while US West Texas Intermediate (WTI) crude fell to $67.86 per barrel, marking their lowest levels in several months.
Investors are closely watching upcoming economic data, including the US nonfarm payrolls report on Friday, for further insights into the Fed’s potential policy moves. Meanwhile, the European Union’s fiscal expansion and continued developments in the trade dispute between the US and its key trading partners will likely influence market sentiment in the coming weeks.
Reuters, Bloomberg, and the Guardian contributed to this report.
