US Dollar Slides to Lowest Level in Four Years as Policy and Fed Risks Mount

The US dollar traded near its weakest level in almost four years as of writing, extending losses for a fourth straight session. The Bloomberg Dollar Spot Index fell as much as 0.7% to its lowest level since March 2022, placing the greenback on track for its worst stretch since President Donald Trump announced universal tariffs last April.

Currency markets reacted swiftly, with investors reassessing the dollar’s role amid rising political and policy risks.

Policy Uncertainty Weighs on the Greenback

The dollar’s slide reflects growing caution around Washington’s policy direction. Market participants pointed to unpredictable decision-making, including renewed geopolitical rhetoric and concerns about US trade and security commitments. Over a longer horizon, fears around Federal Reserve independence, an expanding budget deficit, and fiscal credibility have steadily eroded confidence in the currency.

Source: Bloomberg via X

Strategists highlighted that structural pressures now dominate the narrative. Analysts at Brown Brothers Harriman noted that fading trust in US governance and politicization of monetary policy could outweigh near-term economic resilience. As these risks accumulated, investors trimmed dollar positions despite stable domestic data.

Global Currencies Gain Momentum

As the dollar weakened, major currencies strengthened sharply. The euro climbed to around $1.1972, its strongest level since 2021, while the British pound rose to near $1.3791, also a multi-year high. The Japanese yen advanced about 0.7% to roughly 153.03 per dollar, supported by signals of potential intervention from Japanese authorities.

The Swiss franc also gained ground, appreciating to levels last seen in 2015. Emerging-market currencies joined the rally, with most developing-market FX tracked by Bloomberg advancing against the dollar. An index measuring these currencies, including interest returns, reached a record high as the greenback retreated.

Intervention Signals Add Pressure

Currency markets reacted strongly to signs of official scrutiny over yen movements. Reports indicated that the Federal Reserve Bank of New York contacted financial institutions to review the dollar-yen exchange rate, a step often associated with intervention preparation. Japanese officials later confirmed close coordination with US authorities if sharp currency moves persisted.

Traders described the rate checks as a catalyst that deepened dollar losses. Talk of coordinated action revived speculation about efforts to guide the greenback lower against key trading partners, reinforcing bearish sentiment.

Fed Outlook Shapes Dollar Expectations

The dollar’s weakness unfolded ahead of the January 28th Federal Open Market Committee meeting. The Fed begins deliberations today, with markets pricing a 97.2% probability of no rate change. The previous and forecast federal funds rates both stand at 3.75%, signaling broad agreement around a pause.

Source: Forex Factory

Recent US data showed official CPI inflation holding at 2.7% and PCE inflation edging up to 2.8%, while labor indicators surprised to the upside. These readings gave policymakers room to delay further easing, especially as prior data faced distortion from the 2025 government shutdown. Even so, independent inflation measures pointed to sharp cooling in January, adding complexity to expectations.

December Decision Still Reverberates

The Fed’s December meeting delivered a 25-basis-point cut, lowering the federal funds rate to a 3.50%–3.75% range. That decision marked the third cut of the year and revealed internal divisions, with two members favoring a hold and Governor Miran backing a deeper cut. The mixed signal continues to influence dollar sentiment.

With Jerome Powell heading into one of his final meetings as chair, markets remain alert. Any shift in tone could move currencies quickly. For now, a steady Fed stance combined with political uncertainty leaves the dollar under sustained pressure.