US Dollar softens amid trade doubts and cautious sentiment
- US Dollar Index drifts lower near 99.33 as doubts about US-led tariff reductions grow.
- China denies ongoing trade negotiations; US trade policy shifts viewed as long-term destabilizing.
- Technical indicators tilt bearish, with resistance levels at 99.43, 99.53 and 99.80.
The US Dollar (USD) weakens slightly on Monday as markets kick off a busy week, overshadowed by skepticism surrounding United States (US) trade policy. While US officials hinted at ongoing talks with Asian partners and “daily conversations” with China, Beijing reiterated it is not engaged in negotiations, stressing the lack of winners in a tariff war. This backdrop left the US Dollar Index (DXY) trading modestly lower, around the 99.33 mark at the time of writing.
Optimism that US trade policies might eventually reduce global tariffs is increasingly seen as misplaced. Analysts from Standard Chartered note that multilateralism continues to weaken under the Trump administration, with the World Trade Organization (WTO) sidelined and free trade agreements (FTAs) facing long and uncertain negotiation timelines. Adding to the pressure, the risk of prolonged uncertainty may weigh heavily on global growth prospects.
Daily digest market movers: Quiet markets
- US officials maintain that tariff discussions with Asian nations continue, but China denies any active trade negotiations.
- Standard Chartered warns that hopes for lower global tariffs are unrealistic; WTO mechanisms remain sidelined.
- Chinese e-retailers Temu and Shein raise prices by up to 300% for US consumers, highlighting tariff costs.
- Meanwhile, markets brace for crucial US economic data later this week, including the first-quarter GDP reading and April’s Nonfarm Payrolls (NFP) report.
- Investors will closely watch these releases for signals on whether the Federal Reserve (Fed) could proceed with a potential rate cut at its May 7 meeting.
Technical Analysis: DXY stuck below 100.00 as sellers pressure key support
The US Dollar Index (DXY) remains under bearish pressure, hovering near 99.33 after slipping 0.25% on the day. While the Relative Strength Index (RSI) at 35.28 remains neutral, the Moving Average Convergence Divergence (MACD) issues a sell signal, confirming the underlying bearish tone.
Short- and long-term moving averages reinforce the downtrend. The 10-day Exponential Moving Average (EMA) at 99.80 and the 10-day Simple Moving Average (SMA) at 99.43 signal sell, aligning with the 20, 100, and 200-day SMAs at 101.06, 105.70 and 104.51, respectively.
Resistance is seen at 99.43, 99.53, and 99.80. If the DXY breaks below its immediate support zone of 99.08, it could quickly retest the lower 98.00 handle. Without a meaningful positive catalyst, upside attempts are likely to meet heavy selling pressure ahead of the pivotal economic data later this week.
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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