What's Driving the US Dollar's Recent Weakness?
The US dollar has recorded its fifth consecutive day of decline, dropping 0.29% to 97.69 overnight. This persistent weakening marks a significant shift in currency markets that's having ripple effects across commodities, particularly metals.
Fed Rate Cut Expectations Intensify
Market expectations for more aggressive Federal Reserve interest rate cuts in 2025 have strengthened considerably in recent weeks. Federal funds futures traders now anticipate approximately 62 basis points in rate cuts by year-end, up substantially from the 46 basis points projected before recent comments from Fed Governor Waller.
The market has fully priced in the first rate cut for September, with the CME Group's FedWatch tool indicating a 90% probability for this timeline, while showing only a 22% chance of a July cut. This dramatic shift in expectations is placing significant downward pressure on the dollar as investors adjust their portfolios.
Powell's Congressional Testimony Impact
Fed Chairman Jerome Powell's recent congressional testimony reinforced dollar weakness when he acknowledged the potential inflationary impact of proposed tariffs:
"If it weren't for tariffs, the US Fed might continue to cut interest rates," Powell stated during his testimony to Congress.
This candid assessment suggests the Fed is caught between competing priorities – managing inflation risks from potential tariffs while supporting economic growth through rate cuts. Both Fed Vice Chair Bowman and Governor Waller have signaled support for expediting rate cuts, further pressuring the dollar as markets adjust to this dovish stance.
Geopolitical Tensions Easing
The easing of international tensions has contributed significantly to the dollar's decline. Investors have shifted focus toward trade negotiations aimed at avoiding reciprocal tariffs as the July 9 deadline set by the Trump administration approaches. This deadline has created urgency in diplomatic channels, with officials working to prevent escalation of trade conflicts.
The dollar, traditionally seen as a safe-haven currency during periods of global uncertainty, tends to weaken when geopolitical risks subside. This pattern is playing out in current markets as improved diplomatic relations reduce demand for dollar-denominated assets.
How Are Metals Markets Responding to Dollar Weakness?
The inverse relationship between the US dollar and commodity prices is on full display as nearly all metals are rising in both domestic and international exchanges. This rally demonstrates the fundamental market principle that when the dollar weakens, dollar-denominated commodities become more affordable for buyers using other currencies.
Base Metals Performance Breakdown
The weakening dollar has triggered a broad rally across metal markets with impressive gains across most categories:
- LME tin: +2.54% (leading performer)
- SHFE tin: +1.80%
- SHFE nickel: +1.19%
- LME zinc: +1.06%
- LME nickel: +1.04%
Only LME aluminum bucked the trend, falling 0.48%, while other metals posted gains below 1%. The main alumina contract rose 1.07%, and the aluminum casting contract increased by 0.36%.
These gains reflect not only dollar weakness but also underlying supply-demand dynamics specific to each metal. Tin's outperformance, for instance, comes amid ongoing concerns about concentrate availability and production constraints in major producing regions.
Ferrous Metals Mixed Performance
The ferrous metals sector showed more variability in its response to dollar weakness:
- Stainless steel: +1.36% (third consecutive day of gains)
- Iron ore: +0.07% (marginal increase)
- Rebar and hot-rolled coil (HRC): Both declined, challenging the broader trend
In the coal sector, coking coal rose 2.02% and coke increased by 1.17%, demonstrating the complex interplay between currency movements and industrial demand factors. The latest iron ore forecast suggests this mixed performance may continue through year-end.
Precious Metals Strength
Precious metals, traditionally viewed as dollar hedges, predictably benefited from the greenback's weakness:
- COMEX gold: +0.37%
- COMEX silver: +1.34%
- SHFE gold: +0.52%
- SHFE silver: +1.29%
Silver's outperformance relative to gold reflects its dual nature as both a precious metal and an industrial metal, allowing it to capture benefits from both investment demand and industrial usage expectations. Recent gold highs analysis indicates this trend could strengthen further as monetary policy shifts.
What's Happening in Currency Markets?
The dollar's broad-based decline has strengthened several major currencies, creating significant movements in foreign exchange markets that impact global trade and investment flows.
Major Currencies vs. US Dollar
Several major currencies have reached multi-year highs against the dollar:
- Euro: +0.43%, reaching $1.1658 (highest since October 2021)
- British pound: +0.33%, touching $1.3659 (highest since January 2022)
- Swiss franc: Trading near a 10.5-year high of 0.804 francs per dollar
These movements reflect changing interest rate differentials and economic growth expectations between the US and other major economies. The euro's strength, in particular, comes as markets reassess the relative trajectories of Federal Reserve and European Central Bank monetary policies.
Japanese Yen Dynamics
Interestingly, the dollar rose 0.18% against the Japanese yen to 145.17 yen, bucking the broader trend of dollar weakness. This divergence stems from Bank of Japan policy considerations, as revealed in their June meeting minutes.
Some BOJ policymakers advocated for temporarily stable interest rates due to uncertainties about US tariff impacts. However, Naoki Tamura, a hawkish BOJ Policy Board member, suggested the BOJ might need to "decisively" raise rates to address inflation risks, highlighting growing price pressure concerns within Japan's economy.
This policy divergence explains why the yen hasn't strengthened alongside other major currencies despite the dollar's broader weakness.
How Are Oil Markets Performing?
Oil markets have shown resilience amid dollar weakness, rebounding from sharp declines earlier in the week. This recovery demonstrates oil's complex relationship with currency movements, inflation expectations, and physical supply-demand fundamentals.
Crude Oil Rebounds
Oil prices posted solid gains overnight, reversing recent losses:
- US oil: +0.89%
- Brent oil: +0.42%
These gains reflect not only dollar weakness (which typically supports commodity prices) but also specific factors affecting global energy markets, including production decisions and inventory developments. The recent oil price rally has been further supported by these inventory dynamics.
Inventory Data Supporting Prices
The US Energy Information Administration (EIA) reported significant inventory decreases for the week ending June 20, providing fundamental support for prices:
- Crude oil inventories: -5.8 million barrels (to 415.1 million barrels)
- Gasoline inventories: -2.1 million barrels (to 227.9 million barrels)
- Distillate inventories: -4.1 million barrels (to 105.3 million barrels)
These substantial drawdowns significantly exceeded market expectations, with analysts having projected much smaller inventory changes. The surprising magnitude of these decreases signaled stronger-than-anticipated demand and tighter supply conditions.
Demand Indicators Strengthening
US gasoline product supplied – a proxy for consumer demand – increased to 9.6 million barrels per day, reaching its highest level since December 2021. This key demand indicator rose by 389,000 barrels per day last week, marking the largest weekly increase since late June.
This surge in gasoline consumption suggests strengthening consumer activity and mobility, particularly significant as the summer driving season continues. The combination of falling inventories and rising demand creates bullish fundamentals for oil prices, even as currency factors provide additional support.
What's China's Economic Outlook?
China's economic policies and growth trajectory have significant implications for global commodities markets, particularly metals. Recent statements from top officials provide insight into the country's economic priorities and strategies.
China's Global Economic Integration
Premier Li Qiang emphasized China's commitment to global market integration during the 2025 Summer Davos Forum in Tianjin:
"China will continue to integrate into the global market… contributing what the Chinese economy can to what the world economy needs."
This commitment to economic openness carries substantial implications for metals markets, as China remains the world's largest consumer of most industrial metals. The country's integration policies influence global supply chains, commodity flows, and price formation across metals markets.
Economic Development Priorities
Vice Premier He Lifeng outlined key economic priorities during a recent survey in Hebei, providing a roadmap for China's economic focus:
- Accelerating unified national market construction
- Expanding domestic demand to boost consumption
- Developing a new real estate development model
- Cultivating new quality productive forces according to local conditions
- Promoting high-quality economic development
These priorities indicate a continued emphasis on economic transformation and quality-focused growth rather than simply maximizing GDP expansion. For metals markets, this suggests evolving demand patterns with greater emphasis on higher-value materials and applications rather than traditional infrastructure-focused consumption.
The reference to "new quality productive forces" specifically points to innovation-driven industrial development, which typically involves advanced materials and higher-efficiency production methods. Recent copper price prediction analyses highlight how China's policies may particularly impact industrial metals.
What Economic Data Should Investors Watch?
With markets closely monitoring economic indicators for clues about future monetary policy and economic growth, several upcoming data releases warrant particular attention.
Upcoming Economic Indicators
Several important economic indicators are scheduled for release, with potential to move markets:
- US Q1 GDP final values (real GDP annualized quarterly rate)
- US Q1 GDP price index final values
- US Q1 core PCE price index final values
- US Q1 consumer spending final values
- US Q1 implicit GDP deflator final values
- US May durable goods orders (preliminary)
- US initial jobless claims for week ending June 21
- US May wholesale inventories (preliminary)
- US May pending home sales index
- UK June CBI retail sales balance
- Germany July Gfk consumer confidence index
These indicators will provide updated perspectives on economic growth, inflation, consumer behavior, and manufacturing activity across major economies. Of particular importance will be the US GDP and PCE data, which the Federal Reserve watches closely when making monetary policy decisions. Current US economy trends suggest these indicators will be crucial for near-term market direction.
Central Bank Communications
Bank of England Governor Bailey is scheduled to deliver a keynote speech at the British Chambers of Commerce Global Annual Conference. This appearance could provide valuable insights into UK monetary policy direction, especially given recent strength in the British pound.
Market participants will scrutinize Bailey's comments for any signals about the timing and pace of potential interest rate adjustments, which could affect currency markets and, by extension, dollar-denominated commodities including metals.
FAQs About the Dollar Decline and Metals Rally
Why is the US dollar falling?
The US dollar is declining due to a combination of factors:
- Fed rate cut expectations: Markets now anticipate 62 basis points of cuts by end-2025, up from previous projections
- Central bank signals: Both Powell and other Fed officials have indicated support for rate cuts
- Geopolitical improvements: Easing tensions have reduced safe-haven demand for dollars
- Trade negotiations: Progress toward avoiding tariffs is supporting risk sentiment
These factors collectively create downward pressure on the dollar as investors adjust their currency allocations based on changing interest rate differentials and risk assessments.
How does a weaker dollar affect metal prices?
A weaker dollar typically benefits metal prices through several mechanisms:
- Purchasing power: When the dollar falls, metals become less expensive for buyers using other currencies
- Investment demand: Dollar weakness often drives investors toward hard assets as inflation hedges
- Production costs: Many mining operations have costs in local currencies but sell output in dollars
- Monetary policy: The conditions causing dollar weakness (e.g., Fed easing) often stimulate economic activity
This relationship explains why nearly all metals are rising during the current period of dollar weakness, with LME tin leading the gains at 2.54%.
Which metals are performing best in the current market?
The top performers in the current market environment are:
- LME tin: +2.54%
- SHFE tin: +1.80%
- SHFE nickel: +1.19%
- LME zinc: +1.06%
- LME nickel: +1.04%
Tin's outperformance reflects both dollar weakness and specific supply concerns in the tin market, while industrial metals with exposure to technology and energy transition (nickel, zinc) are also showing strength.
What are the expectations for Federal Reserve rate cuts?
Markets are pricing in approximately 62 basis points of rate cuts by the end of 2025, with the CME FedWatch tool showing:
- 90% probability of the first cut occurring in September
- 22% chance of a July cut
- Full pricing of additional cuts through year-end
These expectations have strengthened significantly following recent comments from Fed officials, including Chairman Powell's acknowledgment of potential tariff impacts on inflation and subsequent monetary policy responses.
How are oil markets responding to recent inventory data?
Oil markets have rebounded following the EIA's report showing:
- 5.8 million barrel decrease in crude oil inventories
- 2.1 million barrel decrease in gasoline inventories
- 4.1 million barrel decrease in distillate inventories
- 9.6 million barrels per day of gasoline demand (highest since December 2021)
These figures indicate stronger-than-expected demand and tightening supply conditions, creating fundamental support for oil prices that complements the tailwind from dollar weakness.
Disclaimer: The information provided in this article is based on market data as of June 26, 2025, and is subject to change as economic conditions evolve. Readers should consider this analysis as informational rather than as financial advice and should consult with qualified financial professionals before making investment decisions based on currency or commodity price movements.
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