May 16 – The U.S. dollar edged lower on Friday, mirroring the decline in U.S. Treasury yields, following a series of weaker-than-expected economic indicators that reinforced expectations for multiple interest rate cuts by the Federal Reserve later this year.
Despite Friday’s downturn, the dollar remained on course for a fourth straight week of gains against the euro, continuing a steady recovery from the abrupt dip that followed the announcement of steep trade tariffs by President Donald Trump in early April. This move, initially perceived as a blow to global trade stability, triggered a sharp reaction across financial markets, including a momentary plunge in the greenback.
However, the dollar rebounded strongly at the beginning of the week, lifted by news of a tentative trade truce between the United States and China. That optimism, though, was short-lived. As fresh economic figures emerged midweek, including weaker manufacturing and retail data, market sentiment began shifting toward a more dovish outlook on U.S. monetary policy. This led investors to pare back their holdings in the greenback in favor of assets in other major currencies.
Analysts have noted a growing disconnect between short-term interest rate movements and the dollar’s broader trend over recent months. Francesco Pesole, a strategist focusing on global rate dynamics, highlighted this divergence, suggesting that while the traditional link between rate expectations and dollar strength has weakened, bearish sentiment on the U.S. currency remains dominant. He pointed out that although market pricing still places the likelihood of a Federal Reserve rate cut before September below 50%, expectations have been inching higher.
Following Thursday’s data release, traders increased their bets on rate easing. Market expectations now suggest approximately 59 basis points of interest rate reductions by year-end, an increase from the 49 basis points anticipated only several days earlier. There’s also now a 40% chance of a 25-basis-point cut by July, according to market projections.
Bond markets responded accordingly. The yield on the benchmark 10-year U.S. Treasury note extended its recent losses, dropping another 5 basis points in European trading hours to rest at 4.41%. At the same time, the 2-year Treasury yield declined by 3.5 basis points, landing at 3.94%.
On the foreign exchange front, the euro gained ground, rising 0.2% to reach $1.1209. Still, it looked set to close the week with a 0.34% loss. The euro had previously performed strongly in March, buoyed by announcements of major public investments in Germany, and again in April when doubts about the dollar’s status as a safe-haven currency briefly roiled U.S. markets.
Meanwhile, the dollar was poised to break a three-week rising streak against the Japanese yen. The greenback declined 0.45% on the day and appeared headed for a weekly loss of 0.15%. This comes after soft economic growth data out of Japan and renewed dovish commentary from a Bank of Japan official prompted further speculation of delayed policy tightening in Tokyo.
Investment strategists are now reassessing their global exposure. Jeff Blazek, who co-leads multi-asset investment strategy at a prominent asset management firm, suggested that U.S. investors consider increasing their allocations to European and Japanese equities and government bonds, even if that means accepting reduced returns due to unfavorable interest rate differentials. He noted the potential for an additional 3% to 5% decline in the dollar against both the euro and the yen over the remainder of the year.
The foreign exchange market was also closely watching developments between Japan and the United States, with reports of possible discussions next week. Japanese Finance Minister Katsunobu Kato has signaled intentions to bring up currency-related concerns in an upcoming meeting with U.S. Treasury Secretary Scott Bessent, especially regarding volatility in the yen-dollar exchange rate.
Elsewhere in Asia, the most notable moves were seen in the South Korean won, where the dollar dropped sharply for a second consecutive session. Reports emerged earlier this month that authorities in Washington and Seoul had engaged in dialogue concerning the foreign exchange market, fueling speculation of potential intervention or coordinated communication efforts. Similar speculation had surrounded the Taiwan dollar earlier in the month, which also saw increased volatility.
By the close of trading, the U.S. dollar had dropped 0.31% versus the South Korean won, reaching a level of 1,391.
Despite the day’s setbacks, the greenback was still managing a modest weekly gain, supported in part by a strong rally earlier in the week. The dollar index, which tracks the currency’s performance against a basket of major peers, fell 0.2% to 100.51 but remained higher over the week due to Monday’s significant 1.3% surge.
In the broader commodity-linked currency space, the Australian dollar climbed 0.30% to $0.6426, while the New Zealand dollar saw a more substantial gain of 0.65%, reaching $0.5913. Both currencies benefitted from the recent decline in the U.S. dollar and an uptick in regional investor confidence.
As traders brace for the coming weeks, attention remains focused on the Federal Reserve’s policy trajectory and potential geopolitical developments that could further influence global risk sentiment and the direction of major currencies.