Dollar confidence shaken: Jobs, politics and deficits test its core – News Air Insight

Since the tariff drama erupted earlier this year, the Federal Reserve has walked a fine line. Through spring and early summer, Chair Jerome Powell struck a cautious stance—first holding rates steady to gauge the fallout, then stressing patience as inflation cooled but trade policy uncertainty clouded the outlook.

The Fed’s message was clear: it would not overreact, instead waiting for the data to show whether tariffs were a passing headwind or a deeper drag.

But at Jackson Hole this year, Powell’s tone shifted. A slowing economy, weakening job creation, and fragile consumer spending prompted him to hint strongly that rate cuts could arrive as soon as September.

For the dollar—once propped up by higher interest rates and Fed confidence—this shift could signal the start of a longer period of weakness.

Here’s why the greenback could soon face serious pressure.

1. Powell’s Pivot: A Cautious Step Toward Cuts

Powell acknowledged that GDP growth has slowed sharply: the economy expanded at just 1.2% in the first half of 2025, less than half the 2.5% pace of last year. Consumer spending—the engine of the U.S. economy—has cooled noticeably.

Against this backdrop, Powell said the Fed no longer has the luxury of deliberate inflation overshoots. Instead, the strategy will revert to a more flexible approach—an acknowledgement that protecting the labour market is now paramount.

For investors, that means lower rates may be on the horizon. And historically, when U.S. yields fall, so does dollar demand.

2. The Job Market Is Flashing Red

For years, jobs were the backbone of America’s recovery, but that support is now weakening fast. In 2024, employers added about 168,000 jobs per month. Over the past three months, that pace has plunged to just 35,000, as companies pull back on hiring amid tariff uncertainty, higher costs, and AI-driven restructuring.

The details are even more troubling. Long-term unemployment—those out of work for more than 27 weeks—has climbed to 1.8 million people, up 20% from last year. This isn’t just a statistic: the longer people remain jobless, the harder it is to re-enter the workforce, creating a drag on both households and productivity.

At the same time, young workers face a perfect storm. Entry-level roles are disappearing, replaced by AI or consolidated into fewer positions, leaving graduates to compete against older workers also seeking jobs. Economists warn of a “lost generation” effect, where delayed careers and incomes spill into housing demand, family formation, and overall consumption.

For the Fed, this is the real red flag: a weakening labour market feeds directly into lower consumer spending—the engine of U.S. growth—and signals the need for easier policy. For the dollar, that means pressure ahead.

3. Politics Enters the Fed’s House

If economic weakness weren’t enough, politics just added a new layer of uncertainty. President Donald Trump shocked markets this week by firing Federal Reserve Governor Lisa Cook—a first in the central bank’s 111-year history.

The move, widely viewed as an attack on Fed independence, rattled investors. Cook herself has rejected the president’s authority to remove her, vowing to remain in her post, while the Justice Department investigates separate allegations of mortgage fraud.

Regardless of the outcome, the damage may already be done. Central banks derive credibility from independence. If markets begin to see U.S. monetary policy as politicised, confidence in the dollar could erode quickly.

4. A Debt Spiral Without End

Alongside jobs, America’s fiscal outlook is turning into its own crisis. In just 48 days, $1 trillion was added to the national debt—an astonishing $21 billion per day. The U.S. is now only a step away from crossing $38 trillion, barely weeks after celebrating the $37 trillion mark.

Deficits are exploding at a pace last seen in wartime. Through the first ten months of fiscal 2025, the U.S. has already run up $1.63 trillion in red ink, with July alone posting a $291 billion shortfall—the second-worst July ever recorded. Spending is the culprit: federal outlays surged nearly 10% year-on-year, while revenues barely grew 2.5%.

Even with lower interest rates, the numbers don’t add up. Lowering borrowing costs may reduce the government’s interest payments somewhat, but it does little to fix the real problem—federal spending is rising far faster than revenues.

Investors are starting to push back, demanding higher yields at Treasury auctions—an early warning that America’s creditworthiness is under scrutiny.

For the dollar, this is dangerous. If confidence in U.S. debt weakens, the world’s reserve currency could quickly lose its safe-haven premium.

The Takeaway: A Dollar on Shaky Ground

The narrative that once supported dollar strength—resilient growth, high yields, Fed credibility, and fiscal stability—is unravelling.

• Growth has slowed.
• Jobs are weakening.
• The Fed faces political interference.
• Debt is exploding at war-time levels.

For now, the dollar remains the world’s reserve currency. But as Powell’s pivot, Trump’s pressure, and Washington’s spending binge converge, the greenback’s dominance may be entering its most vulnerable stretch in decades. The breaking point may not come tomorrow—but the cracks are already visible.

Technically too, the dollar is at a delicate juncture. The DXY is testing a crucial trendline support; a decisive break below could accelerate downside momentum. Immediate targets are clustered near 97.10, while a deeper slide may open the way towards the 96.50 zone.

In other words, both fundamentals and technicals are beginning to rhyme, pointing to a dollar on thinner ice than at any point in recent years.

(The author is MD, CR Forex Advisors. Views are own)

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