US Dollar sees Trump’s tariff plans take all attention in light calendar
- The US Dollar enters the second day of choppy trading with a firm recovery.
- Markets trembled after US President Trump confirmed upcoming tariffs on Canada and Mexico in February.
- The US Dollar Index (DXY) trades higher again with 109.00 in focus.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, got knocked on Monday when tariffs were not part of the executive orders signed by Donald Trump in his first hours as US President. Markets got wrong footed thinking the stance on tariffs got eased and would face broad delay. However, a surprise comment from US President Trump late Monday night triggered a turnaround with reversals in all major pairs, including the US Dollar. President Trump said the application of 25% tariffs on imports from Canada (CAD) and Mexico (MXN) is due at the start of February, with Canadian Dollar (CAD) and Mexican Peso (MXN)devaluing as an immediate reaction. Overall, reversals are taking place on Tuesday from Monday’s losses on nearly all fronts and asset classes impacted by those comments.
Daily digest market movers: Fundamentals to drive this week
- The US Treasury will publish some data this Tuesday in an otherwise very empty economic calendar ahead. At 16:30 GMT, 3-month, 6-month and 52-week Bills will be allocated in the markets.
- Equities are tying up with gains on Tuesday. European equities are flat, while US futures are up near 0.50%.
- The CME FedWatch tool projects a 54.2% chance that interest rates will remain unchanged at current levels in the May meeting, suggesting a rate cut in June. Expectations are that the Federal Reserve (Fed) will remain data-dependent with uncertainties that could influence inflation during US President Donald Trump’s term.
- The US 10-year yield is trading around 4.56% and has a long road to recover if it wants to head back to last week’s levels near 4.75%.
US Dollar Index Technical Analysis: Recovery could get dangerous
The US Dollar Index (DXY) fell in the hands of the bears on Monday, with the bulls taking over again on Tuesday. However, traders need to be aware of some potholes in the road ahead should the DXY head back to 109.00 and higher. With the ongoing recovery on Tuesday, some pivotal upside levels could cause a heavy rejection, resulting in a dead-cat-bounce, trapping US Dollar bulls and squeezing them out towards 107.00 and lower.
If this recovery wants to continue its ascent, the pivotal level to gain control of is 109.29 (July 14, 2022, high and rising trendline). Further up, the next big upside level to hit before advancing further remains at 110.79 (September 7, 2022, high). Once beyond there, it is quite a stretch to 113.91, a double top from October 2022.
On the downside, the first area to watch is 107.85-107.90, which held Monday’s correction. Further down, the convergence of the high of October 3, 2023, and the 55-day Simple Moving Average (SMA) around 107.35 should act as a double safety feature to catch any falling knive.
US Dollar Index: Daily Chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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