US Dollar Declines as Steel Tariffs, China Tensions Hurt Sentiment

June 2, 2025 | New York — The US dollar slipped against major currencies on Monday, as renewed trade tensions between the United States and China, coupled with fresh tariffs on steel imports, weighed on market sentiment and rattled investors seeking clarity on Washington’s global economic strategy.

The Dollar Index (DXY), which tracks the greenback against a basket of six currencies, fell by 0.45% to 103.72, marking its lowest level in three weeks. The move comes amid heightened geopolitical risk and concerns over retaliatory trade measures from Beijing.

Tariffs Stir Trade War Fears

Last week, the Biden administration announced a new round of tariffs on foreign steel imports, citing unfair trade practices and national security concerns. The policy includes a 25% duty on certain Chinese and Southeast Asian steel products, reviving memories of the 2018–2019 tariff standoff.

“Markets are on edge because this isn't just about steel—it's about signaling. It suggests a hardening stance on China ahead of the 2026 election cycle,” said Danielle Carter, Chief Currency Strategist at BNP Paribas.

China’s Ministry of Commerce responded by expressing “strong dissatisfaction” and hinted at “necessary countermeasures” that could impact US agricultural and tech exports.

Yuan Gains Ground, Euro Firms

The Chinese yuan rose modestly in offshore markets, reflecting expectations of capital inflows as Beijing shores up domestic manufacturing to counter external pressures. The EUR/USD pair climbed to 1.092, bolstered by a hawkish tone from European Central Bank policymakers.

Meanwhile, the Japanese yen, often seen as a safe haven, also gained strength, trading at 134.80 per dollar, up 0.3% intraday.

“The dollar is seeing a correction not just because of tariffs, but because investors are rotating into safer or alternative currencies in light of policy uncertainty,” said Reena Patel, Global FX Analyst at Barclays.

Broader Market Reaction

Equity markets opened mixed, with US industrial and export-heavy stocks underperforming on concerns of escalating trade retaliation. The S&P 500 dropped 0.5% in early trading, while the NASDAQ held steady, buoyed by tech resilience.

Bond yields also dipped, with the 10-year US Treasury yield falling to 4.05%, as risk-averse investors sought safer assets.

“There’s a flight to quality underway. Treasuries, gold, and certain EM currencies are getting bid as traders hedge against prolonged trade disruption,” noted Miguel Soto, Head of Macro Strategy at Raymond James.

Currency Markets Await Fed Clarity

Currency traders are also closely watching upcoming Federal Reserve commentary, with Chair Jerome Powell set to speak later this week. The Fed is widely expected to hold rates steady, but rising inflation in services and geopolitical friction may influence forward guidance.

“The dollar’s recent strength was built on Fed hawkishness and robust job data. But if geopolitical factors dominate, the central bank may need to balance caution with inflation control,” said Haruki Nakamura, Senior Economist at Nomura Securities.

China Tensions Add Layers of Uncertainty

The dollar’s decline is also being driven by growing diplomatic frictions beyond trade. Tensions in the South China Sea, as well as mounting US scrutiny over Chinese tech companies, have raised the risk of broader decoupling between the world’s two largest economies.

Washington recently restricted federal agencies from using software developed by firms linked to the Chinese military, escalating the tech standoff.

Beijing, for its part, has begun rolling out incentives for domestic chipmakers, a move seen as preparation for extended tech independence.

Investor Outlook: Stay Cautious, Diversified

Market analysts urge investors to remain cautious but not reactionary. While the dollar’s dip may be temporary, the underlying policy shifts suggest more volatility ahead.

“For investors, this is a time for diversification. Gold, non-dollar denominated assets, and inflation-protected securities are wise plays in such an environment,” said Jonathan Lewis, Portfolio Manager at Fidelity Global Strategies.

Emerging market currencies with strong fundamentals—like the Indian rupee and Brazilian real—are also seeing capital inflows, as global investors reposition portfolios amid dollar uncertainty.

Conclusion

The US dollar’s recent decline underscores a turning point in the global risk narrative. As tariff tensions and China-related uncertainty grow, markets are recalibrating not only currency strategies but also broader asset allocations.

Whether the dollar stabilizes or slides further will depend on a mix of Fed language, diplomatic negotiations, and global investor sentiment in the weeks to come.