The US dollar has recorded its biggest drop in 40 years and it is difficult to rebound quickly in the short term

By: Martin Barkadakos

The dollar fell to its lowest level in more than three years on Thursday, extending one of the longest losing streaks on record as the "sell America" ​​trade gathered pace among overseas investors.

The dollar index, which measures the greenback against six major currencies, hit 97.60 early in the session, its lowest intraday level since March 2022. By late morning, the dollar index was down 0.6% at 98.01.

The dollar index has fallen nearly 10% so far this year and is on track for its worst first half performance in four decades.

The euro, which has the largest weighting in the dollar index, rose to its highest level since October 2021 in early trading. By mid-morning, the euro was up 0.8% at $1.1576.

This time the dollar's decline is particularly noteworthy because normally, tensions in the Middle East and some progress in trade negotiations should support the dollar. However, the dollar did not benefit from this, but instead came under pressure due to comments on trade issues by President Donald Trump and Treasury Secretary Scott Bessant.

Trump told reporters late Wednesday that he could unilaterally impose tariffs on America’s trading partners “in a matter of weeks” if a new deal isn’t reached by July 9. The suspension of so-called “reciprocal tariffs” he announced on April 2 is set to expire on that date.

Meanwhile, Bessant said he supports Section 899 of the Republican tax and spending bill, which would impose an additional tax of up to 20% on foreign investment from countries deemed to have unfair or discriminatory tax policies.

Bessant told the House Ways and Means Committee that while he believes the bill, known as a “retaliatory tax,” is accompanied by a lot of “false information,” it would still allow the U.S. to “prevent our corporate revenues from being diverted to foreign coffers.” The dollar fell this week after the United States and China reached a preliminary trade deal after two days of intense negotiations in London. This is an unusual result because positive trade outcomes usually promote US economic growth, which attracts foreign investors. George Vesey, chief foreign exchange and macro strategist at Convera Payment Platform Group, said: "The dollar remains a key indicator of trade sentiment, and it is significant that the dollar failed to rise further after the so-called agreement with China. The market remains vigilant and waits for clearer signals as to whether the tariff adjustment will actually be implemented or just used as a bargaining chip." Multiple media reports that Israel is preparing to launch a military strike on Iran pushed up global oil prices, but still failed to trigger capital flows to the previously depreciated dollar, and there was no so-called "safe haven buying".

Meanwhile, signs that inflation related to tariffs has not been as severe as expected have boosted expectations that the Federal Reserve may cut interest rates. Consumer prices rose less than expected in May, while factory-gate prices data released on Thursday showed some easing of inflationary pressures.

Expectations of rate cuts have pushed up bond prices and lowered their yields. This typically lowers the value of the dollar in foreign exchange markets because it narrows the yield gap between U.S. investments and those in economies such as Europe or Japan.

In fact, foreign holdings of U.S. Treasuries have fallen by about $20 billion since April and by about 27% over the past four years, according to Fed data. However, a recent report by Bank of America noted that investors are piling into dollar-denominated assets outside the Treasury market.

Nevertheless, Chris Turner, head of global markets at ING, believes the dollar faces further weakness ahead.

"While we do not expect a dollar collapse, we do believe there are enough headwinds to keep the dollar under pressure for the remainder of the year," he said in a report released Thursday.