Dollar Slides Below 98.5 as Tariff Threats and Weak Inflation Data Fuel Market Jitters
The U.S. dollar weakened sharply on Thursday, with the Dollar Index (DXY) falling below 98.5—a level not seen since early 2022—amid escalating trade tensions and mounting expectations of a Federal Reserve rate cut. The decline in the greenback was driven by renewed tariff threats from former President Donald Trump and a softer-than-expected consumer inflation reading for May, further clouding the outlook for U.S. monetary policy and global trade dynamics.
In a surprise announcement on Wednesday, Trump declared plans to formally notify several key trading partners of impending unilateral tariffs within the next one to two weeks. The move, aimed at pressuring countries into more favorable trade deals, revives the protectionist stance that marked his earlier presidency and rattled global markets. Although Trump’s proposal remains in its preliminary stages, it immediately triggered a risk-off sentiment in currency and bond markets.
Adding a layer of complexity, U.S. Treasury Secretary Scott Bessent sought to temper concerns by indicating that the current 90-day pause on reciprocal tariffs could be extended for countries demonstrating “good faith” in ongoing negotiations. While this statement offered some relief, it also underscored the uncertainty surrounding U.S. trade policy—fueling volatility and weakening investor appetite for dollar-denominated assets.
The dollar has been under consistent pressure throughout 2025, and the recent slide below 98.5 reinforces a broader trend of skepticism toward U.S. economic leadership. This sentiment was compounded by Wednesday’s release of May’s Consumer Price Index (CPI) data, which came in lower than market forecasts. The soft inflation reading stoked speculation that the Federal Reserve may begin cutting interest rates as early as September, pushing down Treasury yields and undermining dollar demand.
Markets are now turning their attention to Thursday’s release of the Producer Price Index (PPI), which will provide additional clarity on inflation dynamics and monetary policy prospects. Should PPI data also disappoint, expectations for a near-term Fed pivot will likely solidify, further depressing the dollar.
The weakening dollar has had ripple effects across global asset classes. Emerging market currencies, particularly those with high exposure to U.S. trade flows, have gained modestly on the back of the greenback’s retreat. The euro and Japanese yen also strengthened, bolstered by both relative monetary policy stability and increased safe-haven inflows. In the commodities space, the dollar’s weakness helped lift gold prices above $2,400/oz, while oil benchmarks posted minor gains.
Despite the downward pressure, some analysts believe the dollar could find support if upcoming economic data surprises to the upside or if geopolitical risks trigger a flight to safety. “This isn’t a structural collapse in the dollar,” said Lisa Marquez, Head of Global FX Strategy at Apex Capital. “But it does reflect how jittery markets have become over policy inconsistency and the Fed’s balancing act between inflation control and growth support.”
Nevertheless, the prospect of renewed tariffs adds a significant new layer of uncertainty. If enacted, these trade barriers could not only disrupt global supply chains but also feed back into domestic inflation, complicating the Fed’s policy calculus. The longer-term implications for dollar strength and U.S. economic credibility could be profound, especially if global investors begin reallocating away from U.S. assets.
For now, traders are watching the 97.5–98.0 range on the DXY as a key technical support zone. A break below that level could accelerate downward momentum, particularly if dovish signals from the Fed are accompanied by rising trade frictions.
In a year already defined by macroeconomic divergence and geopolitical flux, the U.S. dollar’s path forward will be shaped by the interplay between inflation data, interest rate expectations, and the credibility of American trade policy. With multiple flashpoints converging, the next few weeks may prove pivotal for global currency markets.
Source
Federal Reserve Board. (2025). Monetary Policy Report. https://www.federalreserve.gov
Bureau of Labor Statistics (BLS). (2025). Consumer Price Index Summary – May 2025. https://www.bls.gov/news.release/cpi.nr0.htm
U.S. Department of the Treasury. (2025). Public Remarks by Treasury Secretary Bessent. https://home.treasury.gov
International Monetary Fund. (2025). World Economic Outlook Database. https://www.imf.org/en/Publications/WEO