US Dollar Weakens Ahead of Fed Speakers: Navigating Trade Policy Uncertainty and Rate Expectations

The US dollar (USD) opened lower on Friday, May 10, 2025, as investors braced for a slate of Federal Reserve speeches and digested the central bank’s cautious posturing after its May 7 policy meeting. With no major Fed events or data releases scheduled for the day, traders turned their focus to upcoming remarks by policymakers and the lingering uncertainty over trade policy’s impact on inflation and growth.

Fed’s “Wait and See” Stance Fuels USD Volatility

The Federal Reserve’s May 6-7 meeting concluded with no policy changes, as the federal funds rate remained at 4.25%–4.5%. Fed Chair Jerome Powell emphasized that the central bank would “wait and see” on future moves, citing heightened risks from President Trump’s trade policies. These tariffs, which have inflated import costs and disrupted global supply chains, pose a dual threat to the Fed’s dual mandate of price stability and maximum employment.

Analysts note that markets have already priced in three rate cuts by year-end (July, September, and October 2025), as reflected in the CME FedWatch Tool. However, Powell’s warnings about tariff-driven stagflation—a combination of high inflation and rising unemployment—have tempered aggressive expectations. By May 10, traders assigned a 60% probability to a June cut, down from 75% earlier in the week, as geopolitical tensions over trade negotiations intensified.

Trade Policy and Inflation: The USD’s Double-Edged Sword

The dollar’s recent decline reflects growing concerns that tariffs could derail progress toward the Fed’s 2% inflation target. While headline inflation dipped to 2.3% in April 2025, core inflation (excluding volatile food and energy costs) remained elevated at 2.6%. Powell highlighted that trade disputes could trigger a “one-time price surge,” complicating efforts to stabilize prices.

Conversely, the USD’s safe-haven appeal could resurface if trade talks falter. Investors often flock to the dollar during periods of global uncertainty, as seen during past trade wars. However, this dynamic is counterbalanced by the Fed’s reluctance to preemptively cut rates—a stance that limits the USD’s upside.

Economic Data and Forward Guidance

The Fed’s caution stems from mixed signals in the economy. While the unemployment rate held steady at 4.2% in April, Q1 GDP contracted by -0.3%, driven by trade-related import surges ahead of tariffs. Analysts at J.P. Morgan noted that this volatility obscures underlying strength in consumer spending and labor markets.

Looking ahead, the May 13 CPI report will be pivotal for USD direction. A higher-than-expected reading could reinforce the Fed’s hawkish tone, stabilizing the dollar. Conversely, a surprise decline might accelerate rate-cut bets, weakening the USD.

Key Fed Speakers to Watch

Though May 10 lacks official Fed events, the following policymakers’ remarks could influence USD movements:
1. Governor Michelle Bowman: Known for her hawkish stance, her comments on inflation risks may amplify dollar strength.
2. President Neel Kashkari: A dovish voice, his emphasis on trade policy’s impact on employment could pressure the USD lower.
3. Vice Chair Michael Barr: His focus on tariff-driven stagflation risks may underscore the Fed’s constrained options, keeping USD volatility elevated.

Conclusion: A Delicate Balancing Act

The USD’s early Friday decline underscores traders’ struggle to reconcile the Fed’s patient approach with escalating trade-related risks. With no immediate policy changes on the horizon, the dollar’s trajectory hinges on two critical factors:
1. Trade Policy Clarity: A resolution to tariff disputes could alleviate inflation pressures, reducing the urgency for rate cuts and stabilizing the USD.
2. Inflation Data: The May 13 CPI report will test whether price trends remain on track to meet the Fed’s 2% target.

Historically, the USD has averaged a 2.1% decline in months following Fed “wait-and-see” stances, per Bank of America data. However, this cycle’s unique blend of trade volatility and geopolitical uncertainty suggests greater swings ahead. Investors should remain attuned to Fed speakers’ nuanced messaging and prepare for a USD that remains as sensitive to trade headlines as to interest rate expectations.

In short, the dollar’s path in the coming weeks will be a barometer of whether the Fed’s patience is rewarded—or whether markets force its hand sooner than expected.