Dollar Falls Due to Recession Fears, Euro and Yen on the Rise

The U.S. dollar weakened on Monday as recession concerns deepened and trade tensions escalated under the Trump administration’s tariff policies.

At 05:30 ET (09:30 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, slipped 0.2% to 102.600. This decline follows last week’s drop to a six-month low before staging a partial recovery.

Trade War Pressures the Greenback

The dollar continued its decline after President Donald Trump reaffirmed his commitment to tariffs, stating they were the only way to address financial imbalances with China and the European Union. The prolonged trade dispute is fueling fears of an economic slowdown, with Goldman Sachs raising its U.S. recession forecast for 2025 to 45%, up from 35% last week.

“The ongoing turmoil in equity markets favors defensive positioning,” ING analysts noted. They highlighted concerns over the U.S. reliance on foreign capital, pointing to the country’s 4% current account deficit as a factor weighing on the dollar.

The economic uncertainty is also increasing expectations that the Federal Reserve will adopt a more aggressive rate-cutting stance. Markets are now pricing in 110 basis points of Fed rate cuts this year, with interest rates projected to bottom out at 3.00% in 2025.

Europe Weighs Retaliation Against U.S. Tariffs

In Europe, EUR/USD edged 0.2% higher to 1.0976, benefiting from dollar weakness. The euro remains attractive as a liquid alternative to the greenback, supported by the eurozone’s 3% current account surplus. However, its trade-dependent economy remains vulnerable.

Meanwhile, German industrial production fell 1.3% in February, exceeding forecasts of a 0.9% decline. Despite weak data, attention is now on European policymakers, who are meeting in Luxembourg to discuss potential retaliatory measures against U.S. tariffs. Analysts suggest the EU may take a more measured approach than China, which recently imposed a sharp 34% tariff on American goods.

GBP/USD slipped 0.3% to 1.2855, retreating after hitting a five-month high last week.

Safe-Haven Yen Surges to Six-Month High

In Asia, USD/JPY dropped 0.7% to 145.89, hitting a six-month low as investors sought safety in the yen. The Japanese currency also gained support from strong wage data, increasing the likelihood of a Bank of Japan rate hike.

Meanwhile, USD/CNY rose 0.4% to 7.3121, its highest in over three months, as Chinese markets reopened after Friday’s holiday. China remains heavily impacted by U.S. tariffs, now facing a cumulative 54% duty on its exports, prompting Beijing to retaliate with a 34% tariff on U.S. goods.

AUD/USD tumbled 0.8% to 0.5991, reflecting risk aversion. The Australian dollar, often seen as a proxy for China’s economy, was hit hard by trade concerns. Australian Treasurer Jim Chalmers warned that U.S. tariffs could have significant economic repercussions, increasing expectations of further rate cuts from the Reserve Bank of Australia this year.