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27.05.2025 12:23 AM
The Dollar Is in Panic
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Everything has become tangled in the international currency market. A few months ago, doubts among Federal Reserve officials about the need to resume monetary easing in September—coupled with confidence from their European Central Bank counterparts in imminent rate cuts—would have sunk EUR/USD. Yet, as spring comes to a close, the euro is confidently heading north. Donald Trump's restructuring of the international trade system affects everyone in the Forex market.

According to Minneapolis Fed President Neel Kashkari, anything is possible. The FOMC official is uncertain whether the federal funds rate will be cut in September. It all depends, he says, on whether the U.S. has concluded trade negotiations with other countries by then. That clarity will determine whether the Fed should ease policy. In contrast, Bank of Lithuania Governor Gediminas Simkus sees ample opportunity for a deposit rate cut at the ECB's next meeting.

Monetary policy divergence, the resulting rise in Treasury yields, and the widening yield spread with European bonds served the EUR/USD bears well in 2022–2024. Today, however, speculators are actively selling off everything related to America, including the dollar.

Dynamics of Hedge Fund and Asset Manager Positions in the U.S. Dollar

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I believe this situation is primarily driven by fear. The idea is that inflationary pressures will prevent the Fed from lowering borrowing costs. In the end, the economy won't be able to withstand such high rates and will plunge into recession. Moreover, the White House's aggressive fiscal stimulus will require a new wave of large-scale Treasury bond issuance — and there may not be enough buyers. Yields will climb across the curve, potentially knocking the U.S. economy off its feet.

The eurozone, meanwhile, is seeing the opposite situation. Yes, trade wars — due to the EU's substantial trade surplus with the U.S. — will hurt German exporters and others across the continent. But the ECB will do everything possible to ease that pain. Monetary expansion will be deployed, and the markets welcome this. A combination of ECB policy easing and German fiscal stimulus could help support the struggling eurozone.

Dynamics of the U.S. Trade with the European Union

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Old beliefs are being challenged in the Forex market, and traders must be adaptable and quick learners to navigate the turbulent waters of international currency trading. I believe the declining trust in the U.S. dollar is significant and likely to endure for quite some time. Officials from the ECB seem to agree, as they think this loss of confidence in the dollar will enhance the euro's appeal.

Technically, on the daily EUR/USD chart, there is an intense battle for the upper boundary of the fair value range between 1.12 and 1.1395. A defeat for the bulls would allow a pin bar to form. A victory would provide a basis to add to long positions opened at 1.1225 and 1.1285.

Marek Petkovich,
Analytical expert of InstaForex
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