The U.S. dollar weakened sharply on Wednesday after President Donald Trump announced a steep increase in tariffs on China, raising concerns about a prolonged trade war and the risk of a U.S. recession.

As of 04:10 ET (08:10 GMT), the Dollar Index—which measures the greenback against a basket of six major currencies—fell 0.4% to 102.277, after touching its lowest level since September 2024.

Dollar Hit by Intensifying Trade Dispute

The latest blow to the greenback came after Trump signed an executive order on Tuesday imposing an additional 50% tariff on Chinese imports, bringing the total U.S. tariff burden on China to 104%. This move was in response to Beijing’s recent 34% retaliatory tariffs on American goods.

The tariff escalation has heightened fears of a U.S. economic slowdown, with markets anticipating further Federal Reserve rate cuts to counteract the potential downturn. Fed fund futures jumped on Wednesday, now pricing in around 111 basis points of rate cuts for the year, up from 92 basis points just a day earlier.

“The dollar is suffering the most from these additional tariffs because the U.S. lacks immediate substitutes for certain Chinese products. This raises inflationary and recessionary risks domestically, while the negative impact on Chinese exporters is becoming less pronounced,” analysts at ING noted.

Goldman Sachs echoed these concerns, warning that markets may still be underestimating the risk of a full-blown U.S. recession.

“We see a high probability of continued market deterioration, leading to weaker equities, wider credit spreads, deeper Fed rate cuts, and increased equity volatility,” Goldman analysts stated.

Euro Gains Ground

The euro strengthened against the dollar, with EUR/USD rising 0.6% to 1.1025, moving closer to last week’s high of 1.1147.

The single currency found support from reports that Germany’s conservatives had reached a coalition agreement with the center-left Social Democrats, alleviating political uncertainty in Europe’s largest economy.

“The euro remains well-positioned to benefit from a loss of confidence in the dollar, given its status as the second most liquid currency and a preferred alternative for FX reserves,” ING analysts said.

Meanwhile, the British pound also edged higher, with GBP/USD up 0.3% to 1.2800 after bouncing from a one-month low. However, the upside remains limited due to concerns over the U.K. economic outlook.

Traders have now fully priced in a Bank of England rate cut in May, with some even speculating a 50 basis-point cut may be on the table.

Yuan Hits Record Low as Trade Tensions Mount

In Asia, the Japanese yen gained as a safe-haven asset, with USD/JPY falling 0.5% to 145.53, near a six-month low. Japan also announced it would send delegates for trade negotiations with the Trump administration, providing some reassurance to investors.

The Chinese yuan, however, continued to slide, with USD/CNY rising 0.2% to 7.3498, its weakest level since November 2007. The People’s Bank of China has now set a weaker midpoint fix for five consecutive days, signaling that Beijing is preparing for a prolonged trade standoff with Washington.