The dollar hits three year low as FTSE 100 reaches record high investors turn to alternative markets and currencies

The US dollar plummeted to its lowest level in over three years on Thursday as signs of a slowing economy and rising government debt deterred investors from holding the once-dominant currency. Weakness in the jobs market coupled with erratic policy manoeuvres from the White House have dramatically shifted market confidence, while the Federal Reserve’s likely pivot to interest rate cuts has added to speculation of prolonged dollar depreciation.

The dollar’s decline coincided with a strong rally in the FTSE 100, which closed at a record 8,884 points, surpassing the previous peak of 8,871 recorded in March this year. This movement highlights a growing global trend of diversifying away from the United States, as investors search for opportunities in alternative markets. Both the Japanese yen and the euro climbed by approximately 1% against the dollar, bringing the greenback’s loss to nearly 10% year-to-date against a basket of major currencies.

Donald Trump’s recent revival of tariff threats further amplified the dollar’s weakness. The US president announced plans to impose country-specific rates on imports, with formal notices expected within weeks. The prospect of additional trade disputes, notably with India over tariffs and trade regulations, has created additional uncertainties for the US economy.

On the domestic front, the Federal Reserve is increasingly expected to reduce borrowing costs more aggressively, reflected by softer inflation figures and weaker jobs data. Reports have indicated that initial applications for unemployment benefits rose to their highest level since August 2023, signalling deeper strains in the labour market.

In London, analysts attribute the FTSE 100 boost to a rotation in global equity markets. Investors are reportedly reassessing the traditional strategy of prioritising American markets, signalling the end of the ‘there is no alternative to America’ (TINATA) era. Major discussions now revolve around reducing exposure to the United States and exploring geographic diversification.

The UK’s trade position received a potential lift as Trump confirmed plans to solidify a bilateral trade deal with the UK. This agreement would reduce US-imposed tariffs on British cars in exchange for relaxed quotas on US ethanol and beef exports to Britain. Still, the pound’s gains against the dollar were tempered by worries surrounding the UK economy, following the announcement of a 0.3% contraction in April GDP figures. Speculation is swirling that the Bank of England may cut interest rates over the summer to support the slowing economy.

Higher levels of US government debt appear to be another factor driving investors away from the dollar. Market strategists believe that escalating debts under Trump’s administration, combined with lower-than-expected economic growth, are creating long-term risks to the currency’s growth potential. The dollar’s fall is making other global markets appear increasingly attractive.