Dollar’s Slide Deepens Amid Mounting Fiscal Concerns
The US dollar index (DXY) extended its losing streak for a third consecutive session on Wednesday, falling to 99.7. A combination of Moody’s downgrade and the lukewarm reception to a proposed tax cut bill in Congress has reignited “Liz Truss-style” fears surrounding the US fiscal outlook, pushing long-term yields higher. In addition, a relatively quiet week for economic data has only amplified the bearish tone, with traders jumping on the downward momentum to avoid being left behind—further reinforcing selling pressure.
While a recent surge in oil prices—driven by escalating conflict in the Middle East—boosted traditional safe-haven assets such as gold (up nearly 4% week-to-date), the US dollar failed to benefit. This divergence underlines the current trend of sustained dollar weakness, with most major currency pairs now retracing to levels seen prior to last week’s US-China trade détente.
Without a meaningful restoration of investor confidence in the US outlook, a strong rebound in the dollar appears unlikely in the near term. A key catalyst would be clearer policy direction; recent trade agreements remain temporary and loosely defined, and are vulnerable to reversal by the US administration. With critical dates looming—9 July for the broader tariff package and 12 August for China-specific measures—continued policy uncertainty is weighing heavily on market sentiment.
Meanwhile, across the Atlantic, improving relations between the UK and EU are contributing to a broader risk-on rally. Eurozone equities are up around 10% so far this month, buoyed by renewed optimism following the recent EU-UK summit, which focused on the potential for a security and defence pact. This builds on earlier momentum fuelled by Germany’s fiscal stimulus, which has notably supported the region’s markets.
As a result, the dollar faces a dual pressure: the “Sell America” trend—driven by domestic policy and fiscal instability—and a growing global risk appetite. Even under normal market conditions, the latter tends to weigh on the dollar as investors rotate into higher-beta assets abroad.
Euro Gains Momentum
The euro has risen 1.5% against the dollar this week, fuelled primarily by a deteriorating US economic outlook. However, sentiment has also been buoyed by the outcome of the EU-UK summit, which, while limited in substance, delivered a symbolically significant boost to the common currency. This week’s agreement likely centres on sector-specific arrangements, but the optics suggest a renewed alignment between the two economies.
Within the broader “Sell America” narrative, this transatlantic cooperation is seen as a counterbalance to US-driven fragmentation. It has supported euro-area assets and helped propel the euro beyond its 21-day moving average, with the currency now eyeing a potential 10% gain year-to-date.
Further upside for the euro would benefit from stronger domestic momentum—particularly improved growth prospects in both the eurozone and the UK. This would help reduce reliance on dollar weakness and provide a more durable appreciation trajectory. However, a more significant and formal de-escalation of US-EU trade tensions may be required for the euro to break substantially higher. The region’s macroeconomic backdrop remains soft, and the European Central Bank has yet to adopt a convincingly less dovish stance.
Market attention is now turning to today’s PMI releases for Europe, along with the German IFO business climate index. Consensus expectations point to gains across services, manufacturing, and composite indicators in May—momentum that could further underpin the bullish narrative.
Sterling Struggles Against Euro Despite Dollar Weakness
UK inflation data surprised to the upside yesterday, prompting a brief spike in sterling as markets pared back expectations of Bank of England rate cuts this year. However, despite rate differentials that would typically favour sterling, GBP/EUR is down 0.4% this week. GBP/USD has climbed more than 1%, but this is largely a function of broader dollar weakness amid deepening US fiscal concerns.
Indeed, sterling has lost ground against most G10 currencies this week, reflecting idiosyncratic weakness in the pound. It briefly hit a new three-year high against the dollar near $1.35 yesterday but failed to break through—a level it has struggled to surpass for a record stretch. Nevertheless, with the “Sell America” trade back in focus, characterised by widespread aversion to US bonds and the dollar, a break above $1.35 may be only a matter of time.
From a technical standpoint, momentum indicators remain positive. A breakout from a short-term consolidation phase and a close back above the 21-day moving average suggest scope for further gains. However, as investors pivot away from US assets, European alternatives—including the euro—are becoming increasingly attractive, capping sterling’s upside around the €1.18 mark.
A growing concern is that the UK may be slipping into a stagflationary environment, with inflation remaining elevated while growth slows. Today’s flash PMI data will offer valuable forward-looking insight into economic health. Last month’s sharp drop in the UK composite PMI into contraction territory raised alarms, and a continuation of that trend would further weigh on sterling across the board.
That said, with sentiment towards the dollar still firmly negative due to US fiscal woes, GBP/USD is expected to remain well-supported in the short term.
