Dollar extends losses following its biggest decline in more than three weeks; here's what is fueling the weakness

Economic Times

14-05-2025

U.S. dollar extended losses as slower-than-expected inflation data raised hopes for Federal Reserve rate cuts later this year. The greenback dipped sharply against major currencies like the euro, pound, yen, and South Korea's won, which surged over 1% following U.S.-Korea forex talks. Investors now expect a rate cut by September as the Fed remains cautious. With April's CPI rising just 0.2%, lower than forecasts, market sentiment quickly shifted. All eyes are now on upcoming U.S. retail sales and Powell's speech. This story breaks down what's driving dollar weakness and what it means for global markets.
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Why is the dollar falling after inflation data?
How are other major currencies performing against the dollar?
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The euro rose 0.33% to $1.1222
The British pound climbed 0.24% to $1.3335
The Japanese yen strengthened 0.96%, sending the dollar down to ¥146.04
What happened between South Korea and the U.S. on forex?
Is the Federal Reserve planning to cut interest rates?
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What does this mean for global markets and investors?
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The U.S. dollar extended losses early Wednesday, continuing its downward slide after posting its biggest drop in over three weeks the previous day. This came on the heels of weaker-than-expected U.S. consumer inflation data, which strengthened the argument for the Federal Reserve to cut interest rates later this year. Simultaneously, signs of easing global trade tensions have shifted investor sentiment, pulling the greenback lower against major currencies.At the core of the dollar's weakness is the April Consumer Price Index (CPI) report. The data showed inflation rose just 0.2% last month, slightly below economists' expectations of a 0.3% increase, according to a Reuters poll. The figure followed a 0.1% decline in March, indicating slowing price pressures across the economy.The softer inflation print dented confidence in the U.S. economy's momentum and added to speculation that the Federal Reserve might cut rates to support growth. According to LSEG data, traders are now pricing in about 53 basis points of interest rate cuts before the year ends, with a likely quarter-point cut expected in September.Following the inflation release, several major currencies gained ground against the dollar:These movements pushed the U.S. Dollar Index—which tracks the greenback against six major peers—down 0.40% to 100.58, marking a sharp turnaround from Monday when the index rose 1% to a one-month high amid optimism about improving U.S.-China trade relations.But that optimism has faded. As Rabobank's Head of FX Strategy Jane Foley put it, "The market is back to being very skeptical and fearful… We have certainly seen the dollar behaving as a risky currency" ever since the April 2 tariff announcement.In Asia, focus turned to the South Korean won, which saw sharp gains after a recent meeting between South Korea's Deputy Finance Minister Choi and U.S. Treasury official Robert Kaproth. The discussions, held on May 5, centered on forex markets, a sensitive topic for both governments.The outcome of the meeting appeared to confirm market suspicions that the U.S. may favor a weaker dollar, adding to the pressure on the greenback. In response, the won surged over 1% on the day, with the dollar last down 1.3% to 1,397.35 won—its lowest level in a week.According to Scotiabank analysts, the talks 'reinforced market suspicions of a U.S. administration that appears to be leaning toward a preference for a weaker dollar,' noting that Asian currencies broadly led gains in the FX market.The Federal Reserve has maintained a wait-and-see approach recently, choosing to hold interest rates steady while monitoring the economic impact of ongoing trade tensions and softening inflation.The next big moment for markets will be Thursday, when the U.S. releases April's retail sales and Producer Price Index (PPI), alongside a closely watched speech from Fed Chair Jerome Powell.These events are likely to offer more clues about whether the Fed will proceed with rate cuts this year. Currently, markets are betting that the Fed could move as soon as September, especially if economic data continues to underperform.For now, the dollar's recent moves reflect growing investor uncertainty. After briefly gaining on hopes of de-escalation in trade wars, the greenback has slipped back as inflation cools and economic data weakens. Currency analysts like Francesco Pesole at ING suggest this is a "clear preference for strategic selling" of the dollar in anticipation of more soft data ahead.In traditional market patterns, the dollar tends to rise during times of global uncertainty. But in this case, it's behaving more like a risk asset, moving in sync with equity markets rather than against them.With traders recalibrating their expectations, all eyes are now on U.S. economic indicators and central bank commentary, which could shape the next leg of the dollar's journey.Because inflation rose less than expected, increasing chances of a Fed rate cut.It jumped after U.S.-Korea forex talks hinted at a weaker dollar policy.