Dollar's Dramatic Plunge Exposes Deepening Political Rifts and Market Ripples

26 June 2025

REUTERS/Rick Wilking

The U.S. dollar has endured its steepest six-month drop since the early 1970s, tumbling more than ten percent in the first half of 2025. What began as a modest slide has escalated into a crisis of confidence, fueled not solely by a shift toward Federal Reserve rate cuts, but by rising political pressure pushing at the bank’s independence most notably from former President Donald Trump. His public critique of Fed Chair Jerome Powell and signals that he may move to replace him by fall has unsettled global markets and triggered a wave of volatility.

Trump's remarks have sparked fears of politicization at the Fed. He called Powell “terrible” and said a new candidate may be announced as early as September or October. This rhetoric has rattled investors and underscored growing concerns that the central bank could become mired in electoral and ideological battles.

Around the world, traders have responded sharply. The euro surged past $1.17, while the Swiss franc reached decade-long highs and the British pound climbed to levels not seen since 2021. In Asia, equity markets performed cautiously some weakening slightly at the open amid dollar uncertainty reflecting a growing sense that monetary policy risk is global, not just domestic .

At the heart of the selloff lies a shift in expectations. Fed futures markets now anticipate a cumulative 137 basis points in interest-rate reductions by early 2027, up significantly from just a month ago. There is even a one-in-four chance of a cut occurring in July, with expectations of 63 basis points of easing by year’s end.

This evolving outlook has had ripple effects. U.S. Treasury yields most notably two-year and ten-year bonds tumbled amid growing optimism about lower rates. Strategists say these moves reflect increased demand for fixed-income assets amid heightened uncertainty and a broader flight from the dollar .

Gold has benefited, trading higher as investors pivot toward safe-haven commodities amid concern over the dollar’s stability and weakening confidence in U.S. monetary institutions .

Underlying the currency and fixed-income fallout is a broader narrative: the perceived erosion of U.S. financial stewardship. Analysts warn that when central bank independence appears compromised, it not only weighs on currency value, it also shakes long-term investor trust. One fund manager told Reuters that institutional investors now see the U.S. policy environment as riskier, driving a shift in asset allocations away from dollar-denominated assets .

Beyond politics, global economic developments are at play. European nations have announced significant defense spending increases, a move that has buoyed the euro. At the same time, easing Middle East tensions highlighted by a tentative ceasefire between Israel and Iran—have helped stabilize oil prices and muted inflation worries .

Domestically, U.S. trade dynamics offer mixed signals. Durable goods orders soared in May, led by a strong uptick in aircraft bookings. Yet contraction in first-quarter GDP and persistent trade uncertainty especially surrounding ongoing tariff disputes have left analysts cautious.

Political maneuvers in Washington add another layer. Congress is locked in a familiar debate over the debt ceiling while the White House considers sweeping tariff adjustments under the so-called “Liberation Day” strategy. Meanwhile, Treasury Secretary Scott Bessent has invoked contingency measures to delay debt-limit default risks until late July.

There are deeper structural concerns too. Some observers warn that the trend of de-dollarization shoppers and sovereigns alike gradually diversifying away from the dollar could accelerate if central bank credibility weakens further .

For now, financial markets are navigating choppy waters. Equity indexes, including the Nasdaq 100 and MSCI’s global benchmark, have managed to climb to new highs, buoyed by optimism around artificial intelligence, resilient corporate earnings, and global fiscal support .

Still, the dollar’s steep fall remains a focal point. As the Federal Reserve prepares for its next meeting and the calendar moves toward tariff deadlines and votes in Congress, investors are bracing for continued turbulence. Will the Fed maintain its independence? Or will political winds pull it off course? The answer may well determine not just the dollar’s path, but the broader course of global markets. In this high-stakes backdrop, the dollar’s slump is more than a currency story, it is a narrative about trust, structure, and the future of U.S. financial governance.