Tariffs, turmoil, and two kevins: Why the Dollar may be running on fumes

The US Dollar’s relative calm since mid-April has masked the storm clouds regathering on the horizon. After a bruising start to the year that saw the greenback slide nearly 11% from its January highs to its April lows, a trio of stabilizers emerged: Trump’s swift backpedaling on the so-called "Liberation Day" tariffs, his denial of plans to fire Fed Chair Powell during a bond market rout, and a stretch of decent non-farm payroll prints that kept recession talk at bay. But those tailwinds now look more like sandbags—temporary ballast on a fundamentally fragile raft.

Yes, the DXY has clawed back some composure, climbing 4% off April lows and holding marginally on either side of that line. But this isn’t strength born of confidence—it’s the quiet you get when traders are frozen mid-air, waiting to see where the next blow lands. And they won’t have to wait long.

Markets initially cheered the reduced bite of the revised tariff deals—particularly with Japan and the EU—but that optimism is cracking fast. Japan’s lead trade envoy is now in Washington to clarify the fine print on what was supposedly a done deal, while Switzerland’s finance chief is trying to hammer down their steep 39% rate. And President Trump’s latest salvo—tariffs on semiconductors and pharmaceuticals—has all the hallmarks of political brinkmanship disguised as economic protectionism. His promise? A pharma tariff that starts small and then ramps to 150% and even 250% within a year or two. Forget clarity—the trade landscape is now shifting faster than companies can reprice their supply chains, and investors are starting to realize it. The Yale data on tariff-induced price increases is grim, and the specter of broadening inflationary taxes on global commerce is once again casting a shadow across the dollar’s floor.

Then there’s the Fed. Powell may still be standing, but his grip on independence looks increasingly tenuous. The surprise resignation of Governor Adriana Kugler has opened the door for an earlier-than-expected nomination of her successor—and perhaps a successor to Powell himself. President Trump’s CNBC interview named names: Kevin Warsh, Kevin Hassett, Chris Waller, and David Malpass.

Betting markets see Hassett as the frontrunner, but the FX market may not be so welcoming. Warsh is the hawk—old-school, inflation-slaying, and dollar-positive. Hassett? More pliable, more political, and likely to green-light rate cuts in service of the administration’s broader goals. A Hassett-led Fed could weaken the already-thinning line between monetary policy and political expediency. The risk here isn’t just about the direction of rates—it’s about credibility. If the Fed becomes perceived as an extension of the Executive Branch, the dollar’s longstanding role as the world's safe haven may fray further.

The one true stabilizer—the U.S. jobs market—is also starting to buckle. The past three payroll reports have failed to crack 100k, a statistical red flag that’s historically preceded recession. Meanwhile, both manufacturing and services ISM employment subindices are heading south. More troubling is the White House’s open warfare with the Bureau of Labor Statistics, including the firing of its chief—an unprecedented act that casts doubt not just on the data, but on the integrity of the process behind it. Positioning-wise, dollar shorts have already been heavily culled, which may be why we’ve yet to see an outright dollar collapse. But with fundamentals deteriorating and political risk on the rise, the path of least resistance is clearly lower.

The euro is essentially a passenger in this story. PMI revisions were a non-event, and EUR/USD remains glued to U.S. macro developments. While two-year rate spreads have narrowed slightly, the pair isn’t rallying the way it did earlier this year, even with a more dovish Fed narrative. Why? Because even as euro bulls target 1.17, the U.S. risk premium—particularly around growth and political dysfunction—hasn't yet been fully repriced. Until it is, EUR/USD may continue to meander, caught between fading dollar strength and the lack of a compelling eurozone catalyst.

The dollar’s resilience post-April was built on shaky ground: tactical tariff walk-backs, Powell’s temporary reprieve, and a still-credible jobs market. All three are now eroding. The Fed’s independence is back in question, tariffs are morphing into broader structural threats, and the jobs data is cracking. Add in rising odds of a dovish Fed appointment, and the dollar is once again standing on a fault line. For traders, the question isn’t whether it will break—it’s which shoe drops first.