Dollar Weakness Intensifies

April 21, 2025

Win Thin

Fed independence is being openly questioned; the admission that this is being studied at all should be taken very seriously and very negatively; dollar weakness is also intensifying
ECB officials are recognizing downside risks; ECB easing expectations have picked up in the wake of last week’s decision to cut rates 25 bp.
It seems a trade deal with Japan won’t be so easy; China is also taking a firmer stance

Please check out our Mind on the Markets Quarterly. We look at three themes shaping markets in Q2: EU integration/disintegration, tariffs and a possible tipping point for US economic exceptionalism, and a “Mar-a-Lago Accord.”

Dollar weakness is intensifying. DXY is trading lower for the fourth straight day near 98.190, the lowest since April 2022, as Fed independence is being openly questioned (see below). The Swiss franc and the euro are both outperforming and so EUR/CHF remains little changed near .93050. USD/JPY is trading lower near 141, while the euro is trading higher near $1.1525 and sterling is trading higher near $1.3400. We continue to believe that much of the recent dollar weakness is due to a growing loss of confidence in U.S. policymakers as well as the negative impact of policy uncertainty on the U.S. economy. As such, we look for continued dollar weakness and view any dollar recoveries as quite fragile, no matter how the U.S. data come in.

AMERICAS

Fed independence is being openly questioned. When asked if removing Powell was an option, National Economic Council Director Hassett responded that “The president and his team will continue to study that.” Until now, most administration officials have stayed away from this minefield but Hassett seemed to go all in, accusing the Fed of acting in the interests of the Democratic Party. Trump has continued to criticize Powell, stressing “I’m not happy with him. I let him know it. And, if I want him out, he’ll be out of there real fast, believe me.”

The admission that this is being studied at all should be taken very seriously and very negatively. Global confidence in U.S. policymakers is already at a very low point after the tariff rollout; firing Powell should be viewed as a Rubicon that cannot be crossed if any shred of confidence in the Fed (and the U.S.) is to be maintained. Fed officials are already circling the wagons. Over the weekend, Chicago Fed President Goolsbee said “There’s virtual unanimity among economists that monetary independence from political interference - that the Fed or any central bank be able to do the job that it needs to do - is really important.” We concur.

Dollar weakness is intensifying. The FX market is always the quickest arbiter of bad policy decisions in a country. In addition, U.S. equity futures are pointing to a lower open while bond yields at the long end are rising. Why would a global investor want to hold assets in a country where central bank independence is at risk? We know that the Trump administration has wanted a weaker dollar all along, but it is coming for all the wrong reasons.

Last week’s speech by Powell made it clear that the Fed remains in wait and see mode. This is at the root of the tensions between the White House and the Fed, as President Trump has always made his desire for lower interest rates clear. Other Fed officials are similarly cautious. Goolsbee speaks today.

EUROPE/MIDDLE EAST/AFRICA

ECB officials are recognizing downside risks. GC member Kazaks warned that “Recession is not currently the base scenario, but with potentially such large-scale changes in geopolitics and global trade, its probability is high.” He added that “Unfortunately, uncertainty in the global economy has increased, and the main reason for this is tariff wars. This is hindering trade, consumption and investment, slowing economic growth worldwide.” We concur. Many are making the mistake of viewing the end of U.S. economic outperformance as a zero sum game, in the sense that other countries will take that mantle. Instead, we see risks that that U.S. drags the global economy down with it.

ECB easing expectations have picked up in the wake of last week’s decision to cut rates 25 bp. The market has nearly priced in a 25 bp cut at the next meeting June 5. Looking ahead, the swaps market is pricing in nearly 100 bp of total easing over the next 12 months that would see the policy rate bottom near 1.25%. Look for the ECB hawks to push back this week against this dovish market pricing. Indeed, GC member Muller said “Financial markets have an expectation that the ECB will further lower interest rates, but it seems to me that we need to be careful in assessing the inflation outlook. There’s no consensus on what the next decision should be.” Centeno speaks later today.

ASIA

It seems a trade deal with Japan won’t be so easy. Prime Minister Ishiba said “If Japan concedes everything, we won’t be able to secure our national interest.” Reports suggest the U.S. is focusing on boosting U.S. shipments of autos and agricultural goods to Japan, but Ishiba stressed that “We have been working to protect Japanese agriculture using various methods, such as tariffs and minimum access rules. We must continue to protect it, and of course, we must also protect consumer safety.” A second round of trade talks is scheduled for the end of this month and despite President Trump’s claim of “big progress” after the first round, Ishiba’s stance confirms our suspicions that it won’t be so easy to secure trade deals within such a short window of time.

Elsewhere, China is also taking a firmer stance. China’s Ministry of Commerce warned that Beijing “resolutely opposes any party reaching a deal at the expense of China’s interests.” If that happens, it stressed that it “will resolutely take reciprocal countermeasures.” Here too, we do not expect China to quickly roll over to U.S. demands.

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