US Dollar Under Pressure as Fiscal Fears Outweigh Economic Data Boost

The U.S. Dollar declined on Friday, giving up gains from the previous session that had been buoyed by unexpectedly strong economic data, including upbeat Purchasing Managers’ Index (PMI) readings and lower-than-forecast jobless claims. The greenback’s brief rally was cut short as investor sentiment shifted once again toward caution, following developments in Washington and ongoing concerns over long-term fiscal sustainability.

On Thursday, the House of Representatives narrowly passed President Donald Trump’s tax bill, marking a significant step toward sweeping fiscal reform. However, despite its short-term stimulus potential, the bill has reignited concerns over the ballooning national debt. Analysts warn that increased government spending and reduced revenue from tax cuts could widen the deficit substantially in the coming years. These anxieties were further amplified by Moody’s recent downgrade of the U.S. sovereign credit rating from Aaa to Aa1, citing structural fiscal weaknesses and governance concerns.

The downgrade has raised alarms across financial markets, prompting a reassessment of U.S. fiscal credibility. In response, yields on long-dated U.S. Treasury bonds surged to multi-month highs earlier this week, reflecting both inflationary expectations and diminishing demand for U.S. government debt. Rising yields typically support the dollar by offering more attractive returns; however, in this case, they appear to be driven more by fiscal risk premiums than economic optimism.

At the same time, geopolitical and trade tensions continue to cloud the outlook. Uncertainty around ongoing tariff negotiations and potential retaliatory measures has further weighed on investor confidence. Markets remain cautious as any escalation in trade disputes could undermine global growth prospects and destabilise financial markets.

Looking ahead, attention is turning to Federal Reserve Chair Jerome Powell, who is scheduled to speak on Sunday. Investors are hoping for clarity on how the central bank is interpreting recent data in light of rising fiscal concerns. A dovish tone from Powell, particularly any indication that the Fed may slow its tightening pace in response to fiscal headwinds, could put further downward pressure on the dollar. Conversely, if Powell maintains a cautious but steady course, it could temporarily stabilise the currency.

“The market is grappling with mixed signals,” said [Analyst Name], Senior FX Strategist at [Institution]. “On one hand, we have solid macroeconomic data; on the other, we’re facing a potentially unsustainable fiscal trajectory. Investors are right to be nervous.”

As volatility returns to currency markets, the dollar’s near-term trajectory will likely be shaped by a complex interplay between domestic policy, global risk sentiment, and the Federal Reserve’s forward guidance.

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