Dollar slides on trade and tax fears

The U.S. dollar plunged anew to its lowest level in six weeks on Monday as June got underway, with U.S. tariff concerns back on the boil after last week’s legal confusion and military tensions rising across the globe.

The euro led the charge, undaunted by the prospect of another interest rate cut from the European Central Bank on Thursday. Germany’s new chancellor, Friedrich Merz, will travel to Washington to meet U.S. President Donald Trump on Thursday as trade talks between Europe and America are watched closely.

With markets still on edge about elements of the U.S. fiscal bill going through the Senate that give the administration the option of taxing companies and investors from countries deemed to have ‘unfair foreign taxes’, the dollar is vulnerable to worries about foreign capital flight.

But the attention on Monday seemed back on the tariff push, with an assumption President Donald Trump will push through levies one way or another despite the legal pushback last week.

The greenback was hit after the weekend by Trump’s plan to double duties on imported steel and aluminum to 50% from Wednesday and as Beijing hit back against accusations it violated an agreement on critical minerals shipments.

It was also a weekend of significant geopolitical tensions and bellicose warnings. Gold crept higher.

U.S. Defense Secretary Pete Hegseth warned on Saturday that the threat from China was real and potentially imminent as he pushed allies in the Indo-Pacific to spend more on their own defence needs. The Ukraine-Russia war continued to rage, with Ukrainian drones hitting dozens of Russian bombers deep inside Russian territory. The Gaza conflict shows no sign of ending.

Major countries are building armaments at pace. Britain will expand its nuclear-powered attack submarine fleet as part of a defence review, one designed to prepare the country for modern war and counter the Russian threat.

Oil prices jumped by about 3% on Monday after producer group OPEC+ kept output increases in July at the same level as the previous two months.

In a big week for U.S. labor market data, there was some encouragement on the interest rate front.

Federal Reserve Governor Christopher Waller said on Monday that rate cuts remain possible in the second half of the year. Given that a rise in inflation pressures tied to Trump’s import tax increases is unlikely to be persistent, “I support looking through any tariff effects on near term-inflation when setting the policy rate,” Waller told a gathering in South Korea.

Elsewhere, China’s manufacturing activity shrank for a second month in May, as expected.

Stocks in Poland .WIG20 fell 1.4%, after nationalist opposition candidate Karol Nawrocki won the second round of the country’s presidential election.

Ahead of Monday’s bell, U.S. stock futures were down about half a percent, with stocks in Europe and Japan down too. U.S. Treasury yields nudged back higher.

Today’s column looks at the week’s big monetary decision in Europe, with the European Central Bank widely expected to lower rates for the eighth time in the cycle and the euro rising regardless.

While the European Central Bank keeps cutting interest rates, the euro keeps rising, as a transatlantic capital reversal upends relative rate shifts and threatens to force the ECB into further easing.

The ECB is widely expected to lower its main borrowing rate on Thursday to 2%, half what it was at its peak a year ago and less than half the Federal Reserve equivalent. It’s also back to what the central bank broadly considers a ‘neutral’ level, meaning it neither spurs nor reins in the economy.

Real, or inflation-adjusted, ECB rates will be back to zero for the first time in almost two years.

What’s remarkable is that after eight consecutive ECB cuts and with the prospect of zero or even negative real rates ahead, the euro has surged more than 10% against the dollar in just four months and 5% against a trade-weighted currency basket of the euro zone’s major trading partners.