The future of the US dollar hinges on upcoming summer economic data, which will reveal whether tariffs are driving inflation or if the effects are temporary, potentially allowing the Federal Reserve to cut rates again.

The next few months are crucial in determining if the Fed can resume rate cuts or if persistent inflation will obstruct the dollar's recovery.

Analysts from Bank of America have observed a significant decline in the USD during the first half of 2025, attributing this to economic and policy uncertainty, which has made the dollar a primary recipient of US risk premium.

Market expectations currently suggest around 28 basis points of rate cuts by September 2025, but Bank of America believes this may not be enough to reverse the dollar's downward trajectory.

Despite some dovish signals from Fed officials and Chairman Powell's willingness to consider cuts if inflation from tariffs does not persist, Bank of America remains cautious about the dollar's stability.

While inflation expectations are stable at the moment, Bank of America warns of potential upside risks stemming from further dovish shifts from the Fed.

The dollar's decline is notable even as US equities outperform their global counterparts, highlighting a risk premium that is currently affecting the currency.

Pressure from the US Administration for lower rates to manage federal interest expenses raises concerns about the Federal Reserve's independence, complicating the situation for the USD.

Investors are particularly attentive to the potential for tariff-driven inflation, which has thus far hindered the Fed from resuming rate cuts.