The U.S. dollar weakened further on Wednesday, hitting a three-month low as concerns grew that a trade war triggered by President Donald Trump could weigh on the world’s largest economy. Meanwhile, the euro surged on expectations of significant fiscal stimulus in Europe.
As of 04:00 ET (09:00 GMT), the Dollar Index (DXY)—which measures the greenback against a basket of six major currencies—fell 0.6% to 105.060, marking its weakest level since early December.
Dollar Pressured by Growth Concerns
The latest round of U.S. trade tariffs against China, Canada, and Mexico took effect this week, prompting retaliatory measures from the affected countries. The situation escalated further after Trump, in an address to Congress, announced plans for additional tariffs, warning that they could cause a “little disturbance” in the economy.
Market sentiment took a hit following a sharp decline in U.S. consumer confidence, which fell to a 15-month low. The GDPNow model from the Atlanta Fed now projects a contraction of 2.8% in U.S. economic growth for the current quarter, a drastic reversal from last week’s growth projection of 2.3% in the positive region. The shifting economic outlook has, at the same time, affected Federal Reserve expectations regarding interest rates.
Analysts at ING noted that the terminal rate for the Fed’s easing cycle has been repriced to 3.50% from 3.75% in the last four weeks.
Euro Surges on Potential Fiscal Stimulus
The euro strengthened, with EUR/USD climbing 0.6% to 1.0684, reaching a three-month high. This rally comes amid expectations of large-scale fiscal stimulus in Europe, following the U.S. decision to pause military aid to Ukraine in its ongoing conflict with Russia.
The European Commission has activated national escape clauses from the Stability and Growth Pact, unlocking €650 billion in national spending, while broader measures could total up to €800 billion. In addition, Germany suspended its debt brake, approving a €500 billion infrastructure fund to stimulate growth.
According to ING analysts:
“Critics argue that European leaders only respond in times of crisis—and certainly, the prospect of the U.S. withdrawing its security umbrella from Europe is a crisis.”
The British pound also gained, with GBP/USD rising 0.4% to 1.2848, supported by broad dollar weakness.
Yen Strengthens on Rate-Hike Bets
The Japanese yen gained strength in Asia, with USD/JPY declining by 0.4% to 149.22. Investors are still betting on Japanese economic resilience and the possibility of further rate hikes by the Bank of Japan.
Meanwhile, USD/CNY edged 0.1% lower to 7.2579, as China prepares for additional stimulus measures to counter trade-related economic pressures. Beijing reaffirmed its 5% growth target for 2025, marking the third consecutive year of maintaining this goal. The Chinese government also announced plans for increased fiscal spending and targeted measures to boost private consumption in the coming months.
