US Dollar Forecast: Slumps to 3-Month Low as Tariffs and Growth Fears Mount

Dollar Slumps as Tariffs and Growth Concerns Weigh on Markets

The U.S. dollar weakened on Tuesday, hitting a three-month low as fears over new tariffs and slowing economic growth pressured the currency. President Donald Trump’s latest round of trade measures, which include 25% tariffs on Canadian and Mexican goods and increased levies on Chinese imports, went into effect, sparking retaliatory actions from affected nations.

At the same time, weaker-than-expected U.S. economic data added to investor concerns, dragging Treasury yields lower and reducing the dollar’s appeal. Traders now turn their attention to key events later in the week, including the European Central Bank (ECB) policy decision and the February nonfarm payrolls report.

At 15:38 GMT, U.S. Dollar Index Futures are trading 106.300, down 0.256 or -0.24%.

Euro Surges on Rate Differentials and Ukraine Developments

The euro climbed 0.89% to $1.0468, extending gains after a stronger-than-expected inflation report and narrowing yield spreads between the U.S. and eurozone bonds. The latest Eurostat data showed consumer price inflation in the euro area at 2.4% year-on-year in February, slightly above the 2.3% forecast but inching closer to the ECB’s 2% target.

Geopolitical developments also provided support for the euro. Hopes for a Ukraine peace deal gained traction after European leaders proposed a plan to present to Washington, which lifted investor sentiment. Meanwhile, reports that Germany may establish new defense and infrastructure funds worth hundreds of billions of euros further boosted optimism about future growth prospects in the region.

Tariffs Hit the Canadian Dollar and Mexican Peso

The Canadian dollar and Mexican peso both fell to one-month lows following Trump’s announcement that 25% tariffs would take effect on Tuesday. The U.S. dollar rose 0.4% against the loonie to 1.4523 and gained 0.9% against the peso to 20.7165.

Despite the sharp initial reaction, analysts noted that the sell-off in both currencies was relatively modest given the scale of the tariffs. Hopes remain that negotiations could lead to an eventual resolution, limiting prolonged damage to trade relations. However, Canada and Mexico have already announced retaliatory measures, which could escalate tensions further.

Weak U.S. Data and Falling Yields Pressure the Dollar

Concerns about the impact of tariffs on the U.S. economy were reinforced by weak economic data. The ISM manufacturing PMI for February came in at 50.3, below expectations and lower than January’s 50.9 reading, signaling softer growth momentum.

Treasury yields also reflected growing economic concerns. The 10-year Treasury yield slipped 4 basis points to 4.36%, while the 2-year yield fell 7 basis points to 3.906%. Lower yields reduced the dollar’s relative attractiveness, especially as expectations of future Federal Reserve rate cuts remain intact.

Market Outlook: Dollar Faces Continued Pressure Ahead of Key Data

The dollar’s near-term direction hinges on upcoming catalysts, including the ECB’s policy decision on Thursday and the U.S. nonfarm payrolls report on Friday. The ECB is widely expected to hold rates steady, but any signals about future policy adjustments could influence the euro’s performance.

Meanwhile, U.S. jobs data will be critical in shaping Fed expectations. A weaker-than-expected report could reinforce concerns about slowing growth, keeping pressure on the dollar. However, if payroll numbers surprise to the upside, the greenback may find some relief.

For now, the dollar remains vulnerable, with rate differentials narrowing and trade risks escalating. Traders will closely watch developments in U.S.-China relations, as well as potential negotiations with Canada and Mexico, for further direction in the FX markets.

Technically, the market is weak and in a position to challenge a major retracement zone at 105.167 to 103.984. Near the upper level of this zone is the 50-day moving average at 105.007.

More Information in our Economic Calendar.