The U.S. dollar declined sharply on Thursday, reaching its lowest level in over three and a half years against the euro, as growing uncertainty about the future independence of the Federal Reserve raised concerns over the stability of U.S. monetary policy.

Market sentiment was shaken by reports suggesting a possible leadership change at the Federal Reserve later this year. These developments have intensified speculation that political influence could interfere with the central bank’s decision-making, potentially weakening its credibility and altering interest rate expectations.

The gap between the current administration’s push for aggressive rate cuts and the Fed’s cautious stance—driven by inflation risks and trade policy uncertainty—has created a volatile outlook for monetary policy in the months ahead.

Markets Reprice Rate Cut Expectations

As a result, financial markets have significantly adjusted their expectations. The probability of a rate cut at the Fed’s July meeting has increased to 25%, up from 12% just a week ago. Forecasts now anticipate a total reduction of 64 basis points by year-end, compared to 46 basis points previously expected.

Widespread Weakness in the Dollar

The dollar weakened broadly across global currency markets:

• The euro rose to $1.1687, its highest level since October 2021.
• The British pound climbed to $1.3690, the strongest since January 2022.
• The dollar fell to 0.8033 against the Swiss franc, the lowest since 2011.
• The franc also reached a record high of around 180.55 against the yen.
• The dollar declined to 144.89 against the Japanese yen.
• The U.S. dollar index dropped to 97.491, the lowest level since early 2022.

Broader economic concerns are also resurfacing, driven by renewed attention to the administration’s trade policies. As the deadline for securing new trade agreements approaches on July 9, investors are increasingly cautious about the potential impact of tariffs on growth and inflation.

Major financial institutions have warned that heightened tariffs could slow U.S. economic growth, accelerate inflation, and increase the likelihood of a recession. The combination of monetary policy uncertainty and trade tensions is raising doubts about the sustainability of U.S. economic dominance in the near term.