Dollar dives amid rising trade frictions and fiscal deficit fears
During the week ending May 23, the U.S. dollar experienced a significant drop amid escalating trade tensions and growing concerns over the country's fiscal deficit. Frustrated by the stalled negotiations with the European Union, President Trump imposed a steep 50% tariff on EU imports last Friday, which further aggravated market anxiety.
The decline was widespread, with the dollar losing ground against the euro, British pound, Australian dollar, and Japanese yen. It also slipped when measured against the Swiss franc, Swedish krona, and Canadian dollar. The Dollar Index—a gauge of the greenback’s strength against six major currencies—fell sharply, dropping almost 2% from 101.09 on May 16 to a low of 99.05 on Friday before rebounding slightly to finish at 99.11.
Amid this slide, the EUR/USD pair rallied by 1.80% over the week. After touching a low of 1.1170 on Monday, the pair climbed to a high of 1.1376 on Friday and eventually closed at 1.1365, compared to 1.1164 the previous week.
Similarly, the British pound surged against the greenback fueled by a larger-than-expected rise in U.K. inflation. Data revealed that the U.K. inflation rate hit 3.5% in April—the highest since January 2024—jumping from 2.6% in March and surpassing forecasts of 3.3%. Consequently, the GBP/USD pair, which closed at 1.3275 on May 16, advanced by 1.98% to end the week at 1.3538, fluctuating between 1.3265 and 1.3542 during the period.
The Australian dollar also saw a boost, gaining 1.44% against the U.S. dollar following a 0.25% cut by the Reserve Bank of Australia, which lowered its cash rate to 3.85% on Tuesday. The AUD/USD pair improved from 0.6403 on May 16 to finish at 0.6495 by the end of the week, moving between 0.6391 and 0.6501.
The USD/JPY pair suffered a steep decline of 2.1%, closing the week at 142.57 compared to 145.63 the previous week. It traded between a high of 145.51 on Tuesday and a low of 142.42 on Friday. This drop coincided with an unexpected jump in Japan's core inflation, which reached 3.5% year-on-year in April—exceeding both market expectations and prior readings—fueling speculation of another rate hike by the Bank of Japan.
Meanwhile, the 6-currency Dollar Index recovered somewhat as the U.S. delayed imposing further tariffs on the European Union, rising to 99.35 from Friday's close of 99.11. Despite this modest rebound, currency pairs showed mixed movements: the EUR/USD hovered around 1.1365; the GBP/USD climbed to 1.3561; the AUD/USD dipped to 0.6454; and the USD/JPY advanced to 144.07 as the yen weakened amid reports that Japan might scale back long-term bond issuances.