US Dollar chokeholds markets after Trump hits neighbouring countries with surprise tariffs
- The US Dollar rolls through markets after President-elect Trump announced more tariff measures.
- Markets are choking on the announcement, with equities recovering earlier losses.
- The US Dollar Index whipsaws around 107.00, with the Canadian Dollar, Mexican Peso and Chinese Yuan as main losers against the Greenback.
The US Dollar (USD) rolls through markets on Tuesday after President-elect Donald Trump communicated on his social media channel that his government will issue an additional 25% tariff on imports from Canada and Mexico, with an additional 10% to the 60% already announced during his election campaign on Chinese goods. Markets are not doing well with this communication, as equities are printing red numbers across the board and the globe while US bond prices are dropping (yields are soaring).
The US economic calendar will show some housing data on Tuesday. With the Housing Price Index for September and the New Home Sales data for October, markets will be able to see if the housing market in the US is cooling down as the last piece that was driving inflation. At the end of the day, the Federal Reserve (Fed) publishes the Minutes of its November 7 meeting.
Daily digest market movers: US Housing data ahead
- At 14:00 GMT, the monthly Housing Price Index for September is due. The number is expected to come in at 0.3%, the same as the August reading.
- At 15:00 GMT, the November Conference Board Consumer Confidence is due to come out, though no forecast is available with the previous reading at 108.70.
- At 15:00 GMT, New Home Sales data for October is expected to show a slide to 0.73 million units against 0.738 million previously.
- The Richmond Fed Manufacturing Index for November will be released at 15:00 GMT as well. The expectation is for a contraction of -10, less severe than the -14 previously.
- At 19:00 GMT, traders can look for clues about the December rate cut expectations in the release of the Fed’s Federal Open Market Committee (FOMC) Minutes for the November meeting.
- Equities are depressed across the board, with losses across Japan, China, Europe. Most losses remain contained to less than 1% on average. US equity futures are breaking the negative tone and are positive for this Tuesday.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 59.6%. A 40.4% chance is for rates to remain unchanged.
- The US 10-year benchmark rate trades at 4.29%, substantially lower from the high printed two weeks ago of 4.50% on November 15.
US Dollar Index Technical Analysis: Mixed bag
The US Dollar Index (DXY) has difficulties to thrive on the back of the comments from President-elect Donald Trump imposing even more tariffs on neighbours Canada, Mexico, and the usual suspect China. The weaker Canadian Dollar (CAD) component is being offset by a stronger Euro (EUR) and Swedish Krona (SEK).
The DXY does not really reflect what is actually taking place in the targeted countries. Hence, the muted reaction in the US Dollar Index does not seem to break out in a way on the back of this tariff announcement.
The fresh two-year high at 108.07 seen on Friday is the first level to beat. Further up, the 109.00 big figure level is the next one in line. The support from October 2023 at 109.36 is certainly a level to watch out for on the topside.
Support comes in around 106.52, the double top from May. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00. Should the DXY fall all the way towards 104.00, the big figure and the 200-day Simple Moving Average at 103.98 should catch any falling knife formation.
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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