US Dollar Decline Fueled by Washington’s Fiscal Policy Risks

The US dollar extended its downward trend on Thursday, hitting its lowest level in nearly two weeks against the Japanese yen. This ongoing US dollar decline reflects deepening investor concerns over the fiscal outlook of the United States. The pressure increased after the US House of Representatives narrowly passed President Donald Trump’s massive $3.8 trillion tax and spending bill.

The bill, while marking a major fiscal policy move, has raised alarms regarding long-term debt sustainability in the US. It includes provisions to raise the federal debt ceiling by $4 trillion, aiming to avoid a government shutdown in August. Despite the approval in the House, the bill now faces scrutiny in the Senate, where further revisions are expected.

Key Global Data Strengthens Other Major Currencies

As confidence in the dollar wanes, major global currencies are gaining traction. Germany’s Q1 GDP significantly beat expectations, doubling the previous estimate. In the UK, retail sales also surprised on the upside, boosting the pound to its highest level in three years. Meanwhile, inflation in Japan rose more than expected, sparking speculation that the Bank of Japan might consider a rate hike—a move that could strengthen the yen further against the weakening dollar.

These developments have further contributed to the US dollar decline, as investors shift focus to economies showing stronger fundamentals and central banks hinting at tighter monetary policy.

Waller Signals Potential Policy Shifts at the Fed

Federal Reserve Governor Christopher Waller hinted that if recent US tariffs are resolved, there could be room for interest rate cuts—an unusual dovish tone in an otherwise cautious policy landscape. His remarks suggest that the Fed is closely watching trade policy developments as a driver for future rate decisions.

This added another layer of complexity to the dollar’s outlook, especially as Treasury yields remained pressured following weak demand for a 20-year bond auction earlier this week.

Energy Prices Drop as OPEC+ Considers Increasing Output

In commodity markets, oil prices slipped as reports suggested OPEC+ might increase output in the coming months. Although the group has not made an official announcement, the mere possibility of higher production levels has pushed prices lower. This comes at a time when energy markets are already volatile due to geopolitical risks and softening global demand projections.

US Supreme Court Ruling and Market Sentiment

Adding to the mix, the US Supreme Court issued a decision that strengthens the independence of the Federal Reserve, a move seen as a positive development for monetary policy stability. At the same time, recent business sentiment surveys in the US showed improvement, pointing to a more resilient economy than previously feared.

Still, equity market performance varies across regions:

• Germany’s DAX index has surged nearly 20% year-to-date, reflecting strong investor confidence in the Eurozone’s largest economy.
• In contrast, the S&P 500 index in the US is down by approximately 1% since the start of the year, highlighting diverging market trajectories.

Outlook: What’s Next for the US Dollar Decline?

The US dollar decline reflects a mix of domestic fiscal uncertainty and stronger economic performance in other regions. With fiscal policy hanging in the balance, energy prices falling, and global currencies gaining strength, traders and investors are recalibrating their expectations for the second half of 2025.

Whether the Fed will respond with rate cuts, and how political developments unfold in Washington, will be key in shaping the next leg of the dollar’s performance. Until then, the markets remain on edge, watching every move in macro data and central bank commentary.