Since May 2025, the U.S. dollar has remained under pressure. Even as U.S. stocks and bond markets gradually recover from the April slump, the greenback hasn’t mirrored that rebound, sparking debate over what’s next for the currency. With mixed economic data and growing geopolitical uncertainty, the dollar appears to be undergoing a structural adjustment — and market opinions are increasingly divided.

In its early May policy meeting, the Federal Reserve left interest rates unchanged, keeping the benchmark rate between 4.25% and 4.5%. While Chair Jerome Powell acknowledged persistent inflation pressures, the tone of the post-meeting statement was notably more cautious, even dropping previous language suggesting potential rate hikes. This shift signals the Fed’s mounting concern over economic uncertainty, and markets are now pricing in a nearly 70% chance of a rate cut by year-end — significantly weakening the dollar’s standing as a yield-driven asset.

Meanwhile, the European Central Bank has signaled that it will delay rate cuts longer than markets previously anticipated, narrowing the yield gap between the euro and the dollar. This has provided short-term support to the euro, further eroding the dollar’s relative advantage.

Global dynamics are also shifting. Renewed U.S.-China trade tensions have begun reshaping currency reserve allocations worldwide. As the Biden administration introduces new tariffs, China and the EU are rolling out retaliatory measures. The EU, for example, is pursuing antitrust investigations into major U.S. tech companies. Against this uncertain backdrop, several central banks have started to reduce their exposure to dollar-denominated assets. As of now, the dollar’s share of global reserves has fallen to 57%, while the euro and Chinese renminbi are gradually gaining ground. Additionally, foreign investors sharply reduced their U.S. Treasury holdings in March, hinting at a broader structural rotation away from the dollar.

Europe’s economy has also offered a relative bright spot. Eurozone GDP grew 0.4% in Q1, outperforming expectations, with Germany, France, and especially Spain posting positive growth. Resilient services activity and early signs of recovery in manufacturing are offering support to the euro. While the ECB’s cautious stance may cap the euro’s upside, the EUR/USD pair continues to trade within a well-defined range — most analysts expect it to move between 1.12 and 1.15 in the near term.

Oil prices have added another twist to the currency landscape. The latest EIA report downgraded the average 2025 Brent crude forecast to $65 per barrel, citing weaker global demand and robust U.S. shale output. This has pressured the currencies of oil-exporting nations — like the Canadian dollar and Norwegian krone — while elevating questions around the future of the petrodollar system. Notably, Saudi Arabia has increased the share of oil trade settled in yuan, subtly challenging the dollar’s dominance. On the other hand, the Australian dollar is holding stronger, buoyed by recovering Chinese demand for iron ore, highlighting growing divergence among commodity-linked currencies.

From a technical standpoint, the U.S. Dollar Index is now testing a key support zone between 100 and 102 after breaking lower. Positioning data shows bearish bets on the dollar have reached multi-year highs. Derivatives markets are echoing this sentiment, with safe-haven flows moving into gold and the Swiss franc. If momentum builds through automated trading flows, it could amplify market volatility.

Looking ahead, the dollar’s trajectory will hinge on upcoming data and policy cues. Signs of a weakening U.S. labor market — particularly if unemployment climbs past 4.2% — could further fuel rate cut expectations. On the flip side, meaningful progress in U.S.-China trade negotiations could spark a short-term dollar rebound. And the ECB’s policy meeting next month may shift the tone on euro interest rates, indirectly driving FX market sentiment.

Bottom line: Although the dollar is under pressure from narrowing rate differentials, capital outflows, and technical sell-offs, an overly pessimistic market could still open the door for a technical bounce. Investors should keep a close eye on economic indicators and the evolving language from central banks — staying agile and managing risk thoughtfully will be key in this uncertain environment.