The United States dollar is expected to continue its decline on the back of tariff-driven uncertainty, fading US exceptionalism, and many years of US dollar overvaluation.
The now-paused tariffs announced in early April saw a spike in economic uncertainty around the world, which led to a sell-off in risk assets, including currencies.
ANZ Research has downwardly adjusted its US gross domestic product forecast for 2025 to just 1.5 per cent. Tariffs will have some impact on US inflation as well in the US, and US personal consumption expenditures (PCE) inflation is now expected to come in a 3 per cent during 2025.
Unless the labour market significantly weakens from here, ANZ Research expects the US Federal Reserve will likely hold rates until the third quarter of 2025, while evaluating the level of inflation that comes on the back of the tariffs.
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A slower economy in the US will impact the rest of the world, especially economies reliant on trade and manufacturing, although the overall impact will likely be mixed.
Small, open economies will likely be able to better deal with the effects through fiscal and monetary policy, especially if they have flexibility to adjust.
These moves will be critical for forex markets, particularly when it comes to relative growth differentials, relative rates, and the relative impacts of global terms of trade
The abrupt shifts in policy have driven a move lower in the US dollar, US equities and higher US yields. Gold prices have benefited. But it’s likely the US dollar has further to fall.
Mahjabeen Zaman is Head of FX Research at ANZ
