Introduction:

The U.S. dollar has been wallowing near multi-year lows against major currencies, influenced by market optimism over U.S. trade deals and increased bets for earlier Federal Reserve interest rate cuts. This dynamic is further shaped by upward revisions to global growth forecasts by Fitch Ratings, stemming from easing US-China trade tensions, while central banks consider their approaches to monetary policy amidst these economic shifts.

Key takeaways from sources:

U.S. Dollar Weakness and Its Drivers: The U.S. dollar has been wallowing near multi-year lows against major currencies like the euro, sterling, and Swiss franc. This weakness is primarily influenced by market optimism over U.S. trade deals and increased bets for earlier Federal Reserve interest rate cuts. The dollar index eased to 97.075, hovering near three-year lows, although it saw a slight uptick to 97.276. Chaotic White House policies and tariffs are perceived to drag on economic growth, eroding the dollar’s strength. The dollar has experienced a greater fall this year than any other since 1973, suggesting a potentially pivotal period for the currency. Its weakness has also coincided with a recovery in the South African rand.
Federal Reserve Monetary Policy Expectations: Investors have interpreted Fed Chair Jerome Powell’s recent testimony as dovish, leading to a significant increase in bets for at least one quarter-point rate reduction by September to 92.4%. The market views a September cut as a “slam dunk”. However, Fitch Ratings, in contrast, expects only a single Fed rate cut in 4Q25, noting that the Fed is likely to be cautious due to slowing U.S. growth, inflation risks from tariffs, and high inflation expectation measures. The upcoming monthly U.S. payrolls report is considered the “marquee risk event”, with a weak report potentially fueling speculation for an even earlier July rate cut. President Trump has also publicly pressed for a drastic cut in the benchmark rate to 1% and expressed a desire to replace Powell with a more dovish chairperson.
Global Growth Revisions and Trade Tensions: Fitch Ratings has made broad-based upward revisions to its global growth forecasts due to the recent de-escalation in US-China trade tensions. World GDP growth is now forecast at 2.2% for both 2025 and 2026, although these rates remain below the 2.9% recorded in 2024 and the longer-term average. Specifically, the U.S. growth outlook for 2025 has been raised to 1.5%, with receding recession risks, while China’s forecast is up to 4.2% and the eurozone to 0.8%. Despite these revisions, the world economy still faces a sharp slowdown induced by severe trade wars. While tariffs have reduced U.S. business and consumer confidence, their impact on the U.S. Consumer Price Index (CPI) has been minimal, though producer prices have risen. The European Central Bank (ECB) is expected to cut rates further to 1.75% in September.
U.S. Trade Policy Developments: Optimism surrounds the progress of U.S. trade deals, particularly a closer tariff agreement with China, including resolutions on rare earth minerals and magnets. While President Trump abruptly cut off trade talks with Ottawa, Canada later rescinded its digital services tax to advance negotiations. Trade deals with other countries might be finalized by the U.S. Labor Day holiday (September 1), extending Trump’s original July 9 deadline. These developments are expected to influence the dollar’s performance, generally supporting it against major currencies like the euro, yen, and sterling, but potentially leading to a decrease against currencies like the Australian dollar.
South African Reserve Bank (SARB) Amendment Bill: Public hearings are being held by the finance standing committee on the SARB Amendment Bill, which seeks to make the State the sole shareholder of the shares in the bank. The bill, introduced by EFF leader Julius Malema, also proposes that the Minister of Finance would appoint certain board directors and auditors. This bill has a history of lapsing and being revived in Parliament since its initial introduction in 2018.
U.S. Fiscal Policy and Market Impact: A massive U.S. tax-cut and spending bill is currently before the Senate, which could add $3.3 trillion to the national debt over a decade. This bill tests foreign appetite for U.S. Treasuries, although the prospect of eventual policy easing has helped Treasuries weather deficit concerns. In broader markets, Asian share indices rose on improved risk sentiment due to revived trade talks, while gold prices were undermined and oil prices struggled due to concerns about increased OPEC+ output.

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Sources referenced:

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