26/06/2025
Dollar Decline Deepens as Fed Expectations Shift and Markets Eye Key Economic Catalysts
Weekly Financial Markets Outlook
The U.S. dollar continued its steep decline, reaching its weakest level since April 2022 and marking its worst first-half performance since the introduction of floating exchange rates in 1973. Year-to-date, the dollar index has lost over 10%, driven by mounting expectations of Federal Reserve rate cuts and political developments that have shaken confidence in the central bank’s independence. President Trump’s increasing criticism of Fed Chair Jerome Powell and his plans to announce a successor as early as September have led markets to anticipate a shift toward a more dovish Fed stance. Futures pricing now implies a total of 63 basis points of easing by year-end, and a one-in-four chance of a rate cut in July.
These developments have translated into lower Treasury yields, with the 10-year yield hovering around 4.27–4.28%, and the 2-year yield falling to 3.77%. The yield curve flattened as investors priced in greater monetary accommodation. At the same time, concerns over rising inflation due to potential tariff effects and reduced dollar purchasing power persist, although the recent reversal in oil prices—now 20% lower year-over-year—has helped to moderate inflation expectations. Markets are also monitoring U.S. debt dynamics closely, with the Treasury Department extending extraordinary funding measures to July 24 and a Congressional vote on the fiscal bill and debt ceiling expected before the July 4 holiday.
U.S. equity markets gained momentum on renewed rate cut hopes and robust earnings in the technology sector. The S&P 500 and Nasdaq 100 approached record highs, supported by strong results from Micron Technology and continued strength in Nvidia, reflecting sustained demand for AI-related semiconductors. Stock futures rose across all major indices, with the S&P 500 and Nasdaq 100 gaining 0.4–0.5%, while global equity sentiment remained firm, aided by easing geopolitical tensions, particularly the ongoing ceasefire between Israel and Iran.
Investor attention now turns to a series of key economic indicators, including final Q1 GDP, which is expected to confirm a 0.2% contraction, and May’s Durable Goods Orders, forecasted at 8.6% month-over-month. Core orders are expected to show minimal growth. Weekly jobless claims are projected to increase slightly to 246,000, while the Personal Consumption Expenditures (PCE) inflation report, June 26th, will be the primary focus at week’s end. The Fed is also set to release its balance sheet data today, alongside remarks from several officials, including Goolsbee, Barkin, Daly, Hammack, and Barr.
Meanwhile, European currencies rallied strongly against the dollar, with the euro rising above $1.17 to a near four-year high, the Swiss franc at a decade high, and sterling reaching levels last seen in 2021. This strength reflects both the weakness of the dollar and improved European economic sentiment, boosted by expanded defense spending and Germany’s fiscal stimulus.
Lastly, in corporate developments, Shell denied reports that it was preparing a bid for BP, stating it was restricted from doing so for six months under UK takeover rules, despite market rumors fueled by media speculation.
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