U.S. Dollar Index Drops 10% Amid Policy Uncertainty, Economic Weakness

The U.S. dollar index has fallen below the 99 mark, marking its first decline since April 2022. This drop represents a more than 10% decrease from its year-to-date high of 110 on January 13. The decline is attributed to several factors, including uncertainty surrounding U.S. government policies and the weakening of the dollar's safe-haven status due to recent comments by Trump about Federal Reserve Chairman Powell.

Analysts point out that the U.S. economy has shown signs of continuous weakness since January 10, with the Citigroup Economic Surprise Index falling from 14.5 to -19.5. This has led to increased market expectations of rate cuts, rising from 1.2 times to 4.2 times by April 4. Consequently, the 10-year U.S. Treasury yield has dropped significantly, contributing to the dollar's relative weakness.

Despite a rebound in U.S. Treasury yields since April 7, the dollar has continued to weaken. This trend is likely due to foreign capital "fleeing" the U.S. Market sentiment has shifted from a "flight to safety" to a "flight to non-U.S." scenario. Prior to April 7, funds sought safety in U.S. Treasuries amid trade tensions. However, since then, some investors have sold U.S. Treasuries and reallocated funds to Europe and Japan, further weakening the dollar against the euro and other currencies.

Historically, the dollar tends to strengthen during economic downturns. However, this time, concerns about the sustainability of U.S. debt and Trump's "isolationist" policies may diminish the dollar's safe-haven status. This could lead to capital flows into assets like the euro, further weakening the dollar.

Market expectations for the dollar's trajectory are divided. Some analysts believe that short-term factors like U.S. inflation and global economic uncertainty could drive the dollar higher. Conversely, many analysts predict that the dollar will continue to decline based on the U.S. economic fundamentals.

In summary, the recent decline in the U.S. dollar index reflects a complex interplay of policy uncertainty, economic slowdown, and shifting market sentiment. While the dollar's safe-haven status has been weakened, its future trajectory remains uncertain amidst conflicting market expectations.