Global Forex Monitor - May 2025

In April, the DXY dollar index recorded a significant decline to a low of 98.28 following the announcement of reciprocal tariffs on April 2nd ("Liberation Day"), measures that penalized global trade and the U.S. economy. The dollar was also affected by Trump's criticism of J. Powell, threatening to remove him if he did not lower interest rates quickly. This led to an unwinding of "long" dollar positions held by speculative accounts, accumulated before Trump's election, thus accentuating its correction. After this fall, the dollar showed signs of stabilization following the announcement of a 90-day pause on reciprocal tariffs. However, this pause does not apply to China, which remains subject to a 145% tariff, with exemptions for certain sectors.Despite the easing of trade tensions, the dollar is expected to continue to correct due to the risk of a technical recession in the United States, a reallocation of international investment portfolios away from U.S. assets, the likely increase in currency hedges against the risk of a larger dollar decline, the likely continuation of Trump's attacks against the Fed, and the desire of U.S. authorities to weaken the dollar. In this context, the DXY dollar index could fall to 95, particularly in the second half of the year, when the Fed is expected to begin cutting its interest rates three times, starting in September.The EUR/USD experienced a strong rise in April, moving from 1.08 to a high of 1.155, before stabilizing around 1.1350 in early May. This appreciation of the EUR/USD is mainly due to the decline of the dollar, linked to Trump's tariff announcements and concerns about the independence of the Federal Reserve. In the short/medium term, the trend remains favorable for the EUR/USD, mainly due to the prospect of a weaker dollar. Furthermore, the growth differential between the United States and the Eurozone should narrow, with a U.S. economy in near-recession and modest but positive European growth, supported by a more aggressive policy mix. In this context, we have revised our EUR/USD forecast upwards to 1.20 this year.