US dollar tumbles over 6% from January peak to near 5-month lows as economic concerns mount

The US dollar, the world's reserve currency, hovered near a five-month low against major peers in Tuesday's session, as concerns over a slowdown in the American economy—amid escalating trade tensions from Donald Trump's tariff wars—dented sentiment, causing the greenback to fall 6.4% from its January high of 110. 

The euro topped $1.09, hovering near November highs, as traders awaited further updates on Germany’s fiscal stimulus. The Indian rupee, on the other hand, remained weak, trading at 87.25 against the US dollar and staying relatively close to its record low of 88, touched in early February. 

Despite the US dollar’s plunge in March, tight liquidity levels and slowing growth forced the RBI to ease its firm control over the currency.

Mounting fears that the world's largest economy may potentially slip into recession are weighing on investor sentiment, prompting a shift from the dollar to other safe-haven currencies, including the Japanese yen and Swiss franc.

Earlier, President Donald Trump declined to rule out a recession, instead describing the current economic phase as a "period of transition." Protectionist trade policies are driving US consumers to save more, as retail sales data for February came in lower than estimates, growing just 0.2% compared to economists' expectations of 0.6%. However, this was still an improvement over the prior month's downwardly revised decline of 1.2%.

Consumer sentiment slumps in March

Consumer spending, a major driver of the US economy, remained weak as consumers are increasingly worried about rising domestic prices. Their worries stemmed from trade disputes initiated by Trump with key trading partners, including Canada, Mexico, China, and the European Union.

The impact of tariffs is expected to drive up domestic prices, forcing consumers to pay more for the same products they previously purchased at lower prices. Amid this backdrop, inflation expectations are rising, with the one-year inflation outlook spiking to 4.9%, the highest level since November 2022.

At the five-year horizon, inflation expectations jumped to 3.9%, the highest since February 1993, according to media reports. Last week, Trump also threatened 200% tariffs on European Union liquor after the EU imposed 50% levies on US whiskey and other goods, signaling that trade tensions are unlikely to ease anytime soon.

Investors are showing their unease by offloading shares at an increasingly rapid pace. At the same time, manufacturing companies fear that trade wars could dampen sales and drive-up input costs, with major players already hinting at price hikes if raw material costs rise.

US Fed policy in focus

The Federal Open Market Committee (FOMC) is set to convene on March 18 and 19 for its second monetary policy meeting of 2025, which is largely expected to remain on the sidelines until the ramifications of Trump's multi-front tariff war can be further assessed.

Inflation in the US for February came in lower than expected, but analysts believe the odds of a rate cut in March have not improved due to ongoing tariff uncertainty.

The Fed is closely monitoring the White House's trade policies and has, on multiple occasions, stated that another rate cut will only occur if it feels confident about the economy. Having worked to bring inflation down to near its 2% target, the Fed is now more concerned about rising prices, which have already influenced policymakers to pause rate cuts in January.

The Fed halted interest rate cuts in January after reducing its benchmark overnight interest rate by 100 basis points to the 4.25%-4.50% range since September, when it began easing monetary policy. Previously, it had raised the policy rate by 5.25 percentage points in 2022 and 2023.

Minutes from the central bank's January 28-29 policy meeting showed that policymakers were concerned about higher inflation resulting from Trump's initial policy proposals. Beyond worries over rising prices, Trump's fiscal expansion is also putting pressure on the central bank, with experts projecting that it may adopt a more hawkish stance than previously anticipated.

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