Dollar Decline Set for Fifth Month as Trade and Fiscal Risks Build

Dollar decline continued Friday as investors braced for another wave of volatility driven by trade policy tensions and fiscal uncertainty in the United States. The dollar index was up 0.3% at 99.56 but remained on course for a fifth consecutive monthly loss, dipping 0.10% for May.

Volatility increased this week after a federal court reinstated sweeping Trump-era tariffs, just one day after another court had moved to block them. President Trump expressed hope that the Supreme Court would reverse the latest ruling, while U.S. officials signaled they may use other presidential powers to enforce the tariffs regardless of legal challenges.

Tariff Confusion Fuels Dollar Decline and Investor Caution

Markets remain jittery as tariff developments cast doubt on U.S. market stability. The uncertainty surrounding enforcement has prompted foreign investors to pull back, dampening the dollar’s appeal.

“The U.S. is becoming less attractive for global capital,” said Kit Juckes, chief FX strategist at Societe Generale. While some capital flows may continue, Juckes added, investors will demand better incentives such as higher yields or a weaker dollar.

Inflation Data in Focus

Markets are now waiting for the U.S. Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred inflation gauge. Economists expect a 2.2% annual rise in April, slightly lower than March’s 2.3%.

Thursday’s jobless claims and growth figures failed to calm recession concerns. A rise in inflation, partly driven by higher import costs from tariffs, could complicate the Fed’s policy path.

Global Currencies Mixed, Emerging Markets Shine

The euro dipped slightly to $1.1331, while the Swiss franc held steady at 0.8243 per dollar. The dollar is still set for monthly losses against the euro, franc, and pound.

In Asia, the Japanese yen hovered at 144.05. Inflation in Tokyo hit a two-year high, adding pressure on the Bank of Japan to raise interest rates despite fragile economic recovery and the looming impact of U.S. tariffs.

Interestingly, emerging market currencies outperformed, with a benchmark index (.MIEM00000CUS) rising 2% in May—its strongest month since November 2023.

Dollar Decline Reflects Deeper Global Shifts

With U.S. fiscal imbalances, legal uncertainty over tariffs, and slowing economic indicators, dollar decline appears to be more than a short-term correction. As investors weigh inflation risks and geopolitical instability, global capital may continue to diversify away from the dollar.