Dollar hits lowest point against euro since 2021, rises against yen

Dollar Drops to Multi-Year Lows Against Euro and Sterling

The dollar reached multi-year lows against both the euro and the British pound on Wednesday, although it managed to gain against the Japanese yen. Traders are currently reassessing their expectations regarding potential interest rate cuts from the Federal Reserve while also shifting their focus toward U.S. fiscal policy.

Market movements appeared rather stunned following a ceasefire agreement between Israel and Iran, especially after a notable fall in the dollar earlier this week.

Last week, the dollar’s strength was bolstered by concerns about rising tensions in the Middle East, but this trend has reversed quite rapidly.

“The market is waiting for the next theme,” observed Steve Englander from Standard Chartered Bank NY Branch, who leads Global G10 FX Research and North American Macro Strategy.

The dollar is also under pressure from expectations for further interest rate cuts this year.

During a second day of testimony before Congress, Federal Reserve Chairman Jerome Powell reiterated that the central bank should hold off on interest rate hikes, anticipating that tariffs from the Trump administration would drive inflation up.

Earlier, Powell indicated that without these tariffs, the Fed would likely continue cutting interest rates.

“The markets took note of that,” Englander remarked, noting that there appeared to be more clarity coming from Powell’s recent comments compared to the previous week. “We’ve seen an increased likelihood of rate cuts,” he added.

Fed officials like Michelle Bowman and Christopher Waller have also indicated that the Fed should consider quick interest rate reductions, adding to rising expectations for such cuts.

Traders dealing in Fed fund futures are now pricing in a reduction of 62 basis points by the year’s end, up from about 46 basis points last Friday, following Waller’s remarks. The first cut is expected as early as September.

“There’s certainly a significant opportunity arising,” said Carl Shamotta, chief market strategist at Kopey in Toronto.

As for tariffs, investors are closely monitoring negotiations ahead of the July 9 deadline set by the Trump administration, which seeks to finalize trade agreements that avoid mutual tariffs.

This deadline might be extended to prevent market instability, especially as Congress works on tax and spending legislation, according to Englander. An extension for tariff suspension could present a modest negative impact on the dollar.

The euro gained 0.43%, reaching $1.1658, marking its highest value since October 2021. The British pound rose 0.33% to $1.3659, also the highest since January 2022. A potential increase in financial spending in the eurozone is supporting the single currency.

The Swiss franc remained close to a decade-and-a-half high, last trading at 0.804 against the dollar.

The dollar rose 0.18% against the yen, fetching 145.17 yen. Policymakers at the Bank of Japan are currently advocating for stabilized interest rates, given the uncertainties regarding the impact of U.S. tariffs on the Japanese economy, as revealed in a summary from the bank’s June policy meeting.

However, even with ongoing uncertainty surrounding U.S. tariffs, some more hawkish members of the Bank of Japan board are stressing the necessity to address inflation risks.