Dollar Tumbles to Four-Year Low Amid Intervention Concerns and Fed Meeting
The US dollar experienced a significant decline, reaching its lowest point in almost four years against a basket of major currencies on Tuesday. This sharp drop comes as financial markets remain on high alert for potential coordinated currency intervention by US and Japanese authorities. Simultaneously, traders are closely monitoring the upcoming Federal Reserve interest rate decision, which adds another layer of uncertainty to the currency landscape.
Multiple Factors Drive Dollar Weakness
The dollar has been under substantial pressure throughout this month due to a combination of factors. These include concerns about Federal Reserve independence and the policymaking approach of US President Donald Trump. Additionally, political disagreements between Republicans and Democrats over funding for the Department of Homeland Security have raised fears of another possible government shutdown, further undermining confidence in the US currency.
President Trump has recently intensified trade tensions by threatening to increase tariffs on imports from South Korea, including automobiles, lumber, and pharmaceuticals, to 25%. He has also warned of imposing a 100% tariff on Canada if it proceeds with a trade agreement with China. These actions have contributed to heightened economic policy uncertainty, exacerbating the dollar's decline.
Yen Strengthens on Intervention Speculation
Much of the focus in the foreign exchange market has centered on the Japanese yen, which rallied by as much as 3% over the past two trading sessions. This surge followed reports that the US and Japan might be conducting rate checks, often viewed as a precursor to official currency intervention. The yen strengthened to below 153 against the dollar, trading at 152.76 at last check.
While there has been no official confirmation of rate checks from authorities in either country, sources indicate that the New York Federal Reserve inquired about dollar-yen rates with dealers on Friday. Japanese officials have stated they are maintaining close coordination with the US on foreign exchange matters, fueling speculation about potential joint action to stabilize currency markets.
Fed Decision and Political Pressure
Investors are eagerly awaiting the outcome of the Federal Reserve's two-day meeting this week for insights into the future direction of monetary policy. Although the Fed is widely expected to keep interest rates unchanged, concerns persist about potential political interference. President Trump has repeatedly urged the central bank to cut rates, and there is speculation that he might announce his candidate to replace Chair Jerome Powell soon after the rate decision, particularly if he disagrees with the Fed's stance.
Market strategists note that the combination of trade tensions, political uncertainty, and intervention risks has created a perfect storm for the dollar. Karl Schamotta, chief market strategist at Corpay, commented, "With the 'tariff man' showing no sign of repentance and the US government headed into another shutdown, economic policy uncertainty is soaring once again." He added that this has intensified the "Sell America" trade that has dominated markets for much of the past year.
Other Major Currencies Gain Ground
As the dollar weakened, other major currencies appreciated significantly. The euro rose 0.96% to $1.19805, approaching levels last seen in June 2021 and nearing the $1.20 threshold. Similarly, the British pound climbed 0.7% to $1.3776, reaching its strongest level since October 2021. The Australian dollar also rallied, gaining 0.9% to $0.6979, its highest point since February 2023.
Against a basket of currencies, the dollar fell 0.9% to 96.212, marking its lowest level since February 2022. The Korean won strengthened 0.5% against the dollar to 1,438.05 per dollar, reflecting broader market movements away from the US currency.
Analysts suggest that while positive fundamentals may eventually support the dollar, current conditions are driving sustained selling pressure. Jonas Goltermann, deputy chief markets economist at Capital Economics, noted in a research report that "the main driver is the fallout from reports that the US Treasury is considering direct currency intervention." This intervention risk, combined with political and economic uncertainties, continues to weigh heavily on the dollar's performance in global markets.
