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Dollar sinks on debt worries and tariff tensions
The US dollar fell sharply this week as debt concerns, political wrangling over Trump's budget bill, and escalating tariff pressure on the EU weighed on sentiment. Meanwhile, UK retail sales beat expectations and Japan's core inflation surged to a 2-year high.
US Dollar Index drops below 99.60 as debt risks mount and Treasury yields retreat.
Trump’s budget bill clears House, raising deficit fears
US pushes EU to lower tariffs unilaterally, threatening 20% duties if Brussels resists.
UK retail sales post sharpest gain since January; Japan’s core CPI hits 3.5%, above forecasts.
The US dollar extended losses on Friday, with the Dollar Index (DXY) slipping toward 99.50, as investor sentiment soured amid a worsening fiscal outlook and renewed trade tensions with the European Union. The week saw the dollar decline over 1%, reflecting a broader pullback from US assets after Moody’s downgraded the US credit rating to Aa1, citing surging deficits and unsustainable debt servicing costs.
At the center of the downgrade is President Donald Trump’s “One Big Beautiful Bill,” a sweeping fiscal package that cleared the House by a narrow vote of 215–214 and now heads to the Senate. The bill includes tax cuts on tip income and incentives for US car production, but the Congressional Budget Office estimates it would add nearly $4 trillion to the national debt, a figure that has alarmed investors and policymakers alike.
US pressure on Europe and fading trade optimism
Adding to the pressure on the dollar, the Financial Times reported that Washington will demand unilateral tariff reductions from the EU during talks today, warning that failure to comply would trigger 20% reciprocal duties. The move could significantly escalate trade tensions, which had temporarily cooled following recent deals with the UK and China.
The trade narrative has weighed on sentiment, despite reassurances from China’s Foreign Ministry that communication with the US remains open, following talks between Deputy Secretary Kurt Campbell and Chinese Vice Foreign Minister Ma Zhaoxu.
On the monetary front, Fed Governor Christopher Waller said markets are “watching fiscal policy closely,” noting that while current data support stability, rising tariffs and a lack of clarity on budget policy could delay interest rate cuts. Markets are now pricing in a 71% chance the Fed holds steady in June and July, according to the CME FedWatch tool.
Global economic data surprise
While US fiscal concerns dominated headlines, economic data from abroad surprised to the upside. UK retail sales rose by 1.2% month-on-month in April, easily surpassing expectations of a 0.2% increase. The sharpest growth since January was driven by a rebound in food store purchases, aided by favorable weather. Excluding fuel, sales climbed 1.3% on the month and 5% annually — the strongest year-on-year growth since February 2022.
Meanwhile in Japan, headline inflation held steady at 3.6%, but core CPI surged to 3.5%, marking the highest level since January 2023 and exceeding consensus forecasts. The rise was attributed to persistently high rice prices amid supply shortages and broader upward pressure on food and services. The data is likely to complicate the Bank of Japan’s outlook, especially after its Q1 GDP miss and growing doubts over the timing of the next rate hike.
Market snapshot
- DXY trades near 99.60, down more than 1% for the week.
- US 30-year Treasury yield retreats to 5.05% after touching 5.15%, the highest since late 2023.
- GBP/USD strengthens further, supported by strong UK retail data and easing BoE cut bets.
- USD/JPY remains stable despite Japanese inflation surprise, with BoJ still expected to hold.
Looking ahead, investor focus will shift to next week’s US PCE inflation report, Eurozone flash CPI, and a critical speech from Fed Chair Powell, which may offer fresh insight into how policymakers are weighing fiscal risks and trade tensions against a backdrop of still-strong economic data.
