Dollar hits 3-year low as Trump eyes Fed shake-up

The US dollar slumped to its lowest level in over three years against the euro on Thursday, as financial markets reacted nervously to growing concerns over the future independence of the US Federal Reserve. The decline followed reports that President Donald Trump is considering replacing Fed Chair Jerome Powell ahead of the November elections, a move that analysts say could damage the credibility of US monetary policy.

Dollar loses ground amid political interference fears

The greenback slipped across major currencies, with the euro climbing 0.2 per cent to $1.1687, its strongest since October 2021, as per Reuters. Sterling also gained 0.2 per cent to $1.3690, the highest level since January 2022. The dollar index, which tracks the currency against six peers, dropped to 97.491, its lowest reading since early 2022.

Market unease intensified after a Wall Street Journal report claimed that Trump was toying with the idea of announcing Powell’s replacement by September or October. Such a move, if seen as politically motivated, could undermine the Federal Reserve’s independence and complicate the central bank’s cautious approach to interest rate management.

“Markets are likely to bristle at any early move to name Powell’s successor, particularly if the decision appears politically motivated,” said Kieran Williams, head of Asia FX at InTouch Capital Markets, as quoted by Reuters. “It could recalibrate rate expectations and trigger a reassessment of dollar positioning.”

Rate cut bets increase as Fed–White House tensions escalate

The possibility of political interference has fed into expectations of a more dovish stance from the Fed. Markets are now pricing in a 25 per cent chance of a rate cut at the central bank’s July meeting, up from just 12 per cent a week earlier, according to Reuters. Overall, traders are factoring in 64 basis points of rate cuts by the end of 2025, up from 46 basis points priced in last Friday.

Trump’s criticism of Powell escalated on Wednesday, when he called the Fed Chair “terrible” for not slashing rates more aggressively. Meanwhile, Powell, testifying before the Senate defended the Fed’s cautious stance, highlighting risks to inflation from the President’s evolving tariff policies. The dollar weakened 0.2 per cent against the yen to 144.89 and fell to its lowest against the Swiss franc since 2011 at 0.8033. The franc also hit a record high against the yen, trading near 180.55, as per Reuters.

Tariffs and recession fears weigh on dollar

Trump’s shifting tariff policy is also driving renewed concern. With the President’s July 9 deadline for trade deals approaching, banks and investors are bracing for further disruptions. JPMorgan, in a note published on Wednesday, warned that higher tariffs could slow US economic growth and lift inflation, projecting a 40 per cent chance of a recession.

“The risk of additional negative shocks is elevated,” JPMorgan analysts wrote, as quoted by Reuters. “We expect US tariff rates to move higher… and our baseline scenario incorporates the end of a phase of US exceptionalism.”

The “end of US exceptionalism," a term referring to America’s post-2008 dominance in global growth and monetary stability has become a central narrative in the dollar’s decline. With investor confidence shaken by domestic political uncertainty and tariff-induced inflationary risks, the greenback’s appeal as the world’s safe haven currency is visibly eroding.

Euro emerges stronger as Europe invests in stability

The euro has emerged as one of the biggest beneficiaries of the dollar’s slide. Investor optimism is growing around Europe’s economic resilience, as governments ramp up investment in defence, infrastructure, and strategic autonomy.

The resulting capital flows into European markets are further strengthening the euro’s appeal as a reserve asset, challenging the dollar’s long-held dominance. With the Fed’s next meeting looming, and US politics in flux, global investors are left weighing whether the era of American monetary stability is entering uncharted territory.

(With inputs from the agencies)