The U.S. dollar edged lower on Tuesday as markets focused on a pivotal tax bill vote, while the euro strengthened amid rising hopes for peace talks between Ukraine and Russia.
As of 04:30 ET (08:30 GMT), the U.S. Dollar Index — which measures the greenback against a basket of six major currencies — dropped 0.3% to 100.05, adding to Monday’s 0.6% decline.
U.S. Tax Bill and Debt Concerns Pressure Dollar
The dollar’s retreat began Monday following Moody’s decision to downgrade the U.S. sovereign credit outlook, stripping it of its top-tier AAA rating. Attention has now turned to the congressional debate over President Donald Trump’s proposed tax reform, expected later in the session. The bill could add between $3 trillion and $5 trillion to the existing $36 trillion national debt, amplifying concerns about fiscal sustainability.
Mounting debt, persistent trade tensions, and waning confidence in long-term U.S. economic dominance have all contributed to the dollar’s weakness. The Dollar Index has now fallen more than 10% from its January highs — one of its steepest three-month declines on record.
While Tuesday’s economic calendar is light, markets will closely monitor speeches from Federal Reserve officials — including Thomas Barkin, Mary Daly, Raphael Bostic, and Adriana Kugler — for clues on the Fed’s policy outlook.
“Fed hawks are signaling just one 25bp rate cut this year, compared to the 55bp currently priced in by markets,” ING analysts noted. “Still, we don’t expect the dollar to rally much on these comments. Instead, focus may shift to trade headlines, Treasury performance — especially the 20-year auction — and upcoming hard economic data.”
Euro Supported by Peace Talk Optimism
In Europe, EUR/USD rose 0.2% to 1.1266, lifted by optimism over potential negotiations to end the conflict in Ukraine. Ukrainian President Volodymyr Zelenskiy announced that Kyiv and its allies are exploring the possibility of a high-level summit involving Russia, the U.S., EU members, and the U.K.
Economic data showed Germany’s producer prices fell 0.6% in April from the previous month and were down 0.9% year-on-year, reinforcing expectations of continued monetary easing. The European Central Bank, having already cut rates seven times over the past year, is widely expected to lower them again at its June meeting.
“We slightly favor EUR/USD pushing higher in these calm markets,” said ING. “A breakout above the 1.1265–1.1300 zone could pave the way to 1.1380.”
Meanwhile, GBP/USD rose 0.2% to 1.3386, with sterling gaining modest support from improved post-Brexit relations between the U.K. and EU following a recent summit.
Asia: Yen Rises, PBOC Cuts Rates
In Asia, USD/JPY fell 0.4% to 144.31 as the yen continued to appreciate. Comments earlier this week from the Bank of Japan’s Deputy Governor suggested that further interest rate hikes may be on the horizon.
USD/CNY edged 0.1% higher to 7.2198 after the People’s Bank of China cut key lending rates for the first time since October 2024, in an effort to support economic growth amid ongoing U.S.-China trade tensions. The one-year Loan Prime Rate (LPR) was reduced by 10 basis points to 3.0%, while the five-year LPR — a benchmark for mortgage rates — was lowered to 3.5% from 3.6%.
Elsewhere, AUD/USD climbed 0.6% to 0.6422 after the Reserve Bank of Australia slashed its main cash rate to a two-year low of 3.85%, citing a deteriorating global economic outlook and slowing domestic inflation.
