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Donald Trump’s recent trade threats caused the dollar to drop to its lowest point in three years on Thursday, as increasing concerns about trade and geopolitical issues added more pressure to the currency.

The dollar declined after the US president informed reporters that he would be sending letters to trading partners to specify new tariff rates in the upcoming weeks, with the 90-day halt on “reciprocal” levies ending next month.

The greenback decreased by 0.8 percent against a basket of its trading partners, such as the pound and the euro. This decrease marks a fall past the low experienced after Trump’s “liberation day” tariff actions in early April, reaching its weakest point since March 2022.

“[Trump’s] comment certainly points to renewed escalation in trade tensions ahead of the official deadline date,” said Derek Halpenny, an analyst at MUFG.

Investors were also digesting a trade truce between US and China announced on Wednesday, and rising tensions between the US, Israel and Iran, with the Trump administration authorising dependants of military personnel to leave the Middle East.

“We’ll see what happens,” Trump told reporters on Wednesday. “They [Iran] can’t have a nuclear weapon, very simple.”

While trade tensions have continued to weigh on the dollar, stocks have since rebounded from their April plunge, with the S&P 500 index closing in on a fresh all-time high in recent days.

Wall Street slipped following the open, with the S&P down 0.2 per cent. Stocks also fell in Europe, with the broad Stoxx Europe 600 down 0.5 per cent.

Analysts from Deutsche Bank suggested that some of Thursday’s dollar move could be attributed to news, revealed by the FT, that the US Pentagon was reviewing its 2021 submarine deal with the UK and Australia.

“Reporting that the US is re-evaluating its participation in the Aukus defence pact is highly relevant for the dollar, in our view,” wrote head of FX research George Saravelos.

“A weaker geopolitical alignment between the US and its allies undermines US inflows,” he said, adding that Australian investors had already raised the issue in meetings on Thursday morning.

Lower-than-expected US inflation data on Wednesday and Thursday have also weighed on the dollar by opening the door to faster interest-rate cuts by the Federal Reserve. Futures markets are fully pricing in two quarter-point cuts from the Fed this year.

By contrast, signals from the European Central Bank last week that it may be close to the end of its rate cutting cycle have pushed the euro higher. It climbed 0.9 per cent to $1.159 against the dollar, touching its strongest level since November 2021.

The moves compounded a slide in the dollar that has taken it down almost 10 per cent this year as economic worries over the trade war mix with concerns over a rising budget deficit and signs that some investors are reducing their exposure to US assets. A budgetary provision that would allow the government to raise taxes on foreign investments has added to the unease.

“Foreigners are selling every rally in the dollar on policy chaos, ballooning debt and other threats to their investments,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Weakness in the greenback “has much more room to run”, said Vasileios Gkionakis, senior economist at Aviva Investors. “The shift away from US exceptionalism is driving the US risk premium higher and is weighing on the value of the dollar.”