This recent decline reflects growing investor unease about where the Federal Reserve is headed next—and whether its current strategy is sustainable amid shifting economic signals.
Since the beginning of 2025, the Federal Reserve has kept its benchmark interest rate in the range of 4.25% to 4.50%. This high rate is part of its effort to curb inflation, which has lingered above the Fed’s 2% target. By raising borrowing costs, the Fed aims to reduce consumer spending and bring inflation under control. However, signs of an economic slowdown are becoming harder to ignore.
Despite these warning signs, markets are not expecting the Fed to lower rates at this week’s policy meeting. According to CME Group’s FedWatch Tool, investors assign only a 1-in-3 chance of a rate cut at the central bank’s next major session in June, underscoring the uncertainty now clouding the Fed’s decision-making process—and the dollar’s path forward.
Adding to the volatility is the return of trade tensions. In early April, President Donald Trump announced sweeping “reciprocal” tariffs aimed at U.S. trading partners. While these new tariffs have not yet been implemented, their announcement alone has already disrupted financial markets and sparked anxiety among investors and policymakers.
Economists warn that even if these tariffs are watered down before implementation, they could still dampen economic growth and drive inflation higher. This would complicate the Fed’s job even further, as it tries to balance controlling inflation with keeping the economy from slipping into recession.
These developments are particularly concerning because they come at a time when the U.S. economy was already expected to slow after its post-pandemic recovery phase. Sluggish growth, when combined with higher import costs due to tariffs, could present a dual challenge: weakening demand while pushing prices up.
One of the key reasons behind the dollar’s current weakness is the growing divide between hard and soft economic data—a disconnect that has investors, analysts, and central bankers scratching their heads.
Hard data consists of concrete figures such as GDP growth, unemployment rates, manufacturing output, and retail sales. These indicators reflect past performance, showing us what has already occurred in the economy. So far, this data continues to show a reasonably strong economy. Job creation is steady, consumer spending is relatively resilient, and industrial activity hasn’t yet declined sharply.
Soft data, on the other hand, reflects how people and businesses feel about the economy. It includes surveys on consumer confidence, business outlooks, and inflation expectations. These indicators are forward-looking and attempt to predict what may come next.
Right now, the story told by soft data is much gloomier. Consumer confidence is fading, and many businesses report growing concern about future sales, hiring, and investment. This divergence between perception and reality has created a murky picture of the U.S. economy’s true health.
For investors, this ambiguity has become a source of concern. The dollar’s decline may partly reflect a growing belief that sentiment—usually a leading indicator—will soon drag the hard data down with it.
The Federal Reserve now faces one of its most delicate balancing acts in decades. On one side, hard data tells a story of continued resilience. On the other, the mood on Main Street and in boardrooms is turning grim. The key question is certainly whether or not the Fed should respond now to the warnings in soft data, or wait for hard evidence of a slowdown?
If the Fed cuts rates too soon, it may reignite inflation and undo much of the progress made in the past year. But if it waits too long, it risks falling behind the curve and pushing the economy into a deeper recession.
According to the Baker-Bloom-Davis Index, which tracks uncertainty in U.S. monetary policy, investor anxiety about what the Fed will do next is now at its highest level since 1985—excluding the pandemic period. That makes this one of the most unpredictable moments in recent U.S. economic history.
Source: Fred Economic Data
Economists at Goldman Sachs believe the Fed will soon change its priorities. The firm forecasts three rate cuts in July, September, and October, arguing that a softer economy will eventually push the central bank to act—even if inflation hasn’t fully returned to target.
For years, the U.S. dollar has benefited from a combination of aggressive interest rate hikes, a relatively strong economy, and its longstanding status as the world’s safe-haven currency. But that narrative is beginning to change.
Source: ActivTrader
With interest rates likely nearing a peak and economic uncertainty on the rise, the dollar’s advantages are starting to fade. As speculation grows about upcoming rate cuts, the dollar is losing its appeal to global investors seeking higher yields and stability.
Many are now looking to diversify their holdings. European and emerging-market currencies are regaining attention, and the Euro, British Pound, Swiss Franc and Japanese Yen have all gained ground against the American Dollar. The Taiwanese Dollar has strongly increased against the USD since the beginning of the month with a recent surge of almost 10% in a couple of trading days, reaching three-year highs.
This shift isn’t just about interest rates—it’s a broader reassessment of global opportunity. If the U.S. slows while other regions stabilize or grow, capital may flow elsewhere, putting further downward pressure on the dollar.
