The dollar has been rangebound between 1.14 and 1.18 during the summer months as the trade war gradually de-escalated. The tariffs threatened on Liberation Day were scaled back and, crucially, were not met with retaliation. The US reached agreements with most of its trading partners before the August 1 deadline and extended a tariff truce with China, delaying the imposition of three-digit duties until November 10. Indeed, investor confidence took a big hit on April 2, causing major outflows from US assets and further accentuating the dollar’s fall. Yet, as levies were watered down, market sentiment recovered, also bolstered by renewed optimism in AI as hyperscalers’ capex reached new highs.
Despite the dollar’s summer pause, we continue to believe that the risks are to the downside for the greenback. For one, the trade risk has not disappeared. Indeed, at the end of September, Trump unveiled new tariffs on a range of industries, including 100% duties on branded drugs and 25% tariffs on heavy-duty trucks. It also remains to be seen whether the US will be able to strike a deal with China that satisfies both parties. Secondly, and more importantly, the outlook for the dollar hinges on two critical, interdependent factors. Although the US economy has proved far more resilient than expected, it is slowing. Meanwhile, growth in the euro zone is expected to reaccelerate next year as the fiscal impulse sets in. After a 200-bp reduction in official rates during the past year, the ECB has hinted that further cuts may be unlikely while the Federal Reserve resumed rate cuts this September. The direction of both growth and interest rate differentials will therefore favour the euro. Finally, investor confidence could be shaken again if the Fed’s independence is questioned as we await President Trump’s upcoming appointments to the Board, a development that would be especially negative for the dollar.
Date of report: October 6th 2025