While the turmoil across financial markets has eased a bit this week, the dollar has continued to weaken across the board. The gap between actual exchange rates and what short-term interest rate differentials point to has widened a bit further, suggesting that perceptions around the dollar’s safe-haven status are not improving. President Trump’s renewed criticism of Fed Chair Powell this week is a reminder that trade policy is not the only channel through which the administration’s unconventional approach could undermine the dollar and US asset markets. As we set out in our combined Asset Allocation and FX Outlook this week, our base case is that the dollar recovers a bit of ground over the rest of 2025. That said, the risks have pliantly shifted against the dollar; some of the recent damage to confidence will probably prove longer-lasting; and the medium term outlook for the greenback has worsened.
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