US Dollar Index loses ground as uncertainty persists over Trump’s tariff policy
- The US Dollar Index takes a breather in Thursday’s early European session.
- Tariff uncertainty is raising costs in the US, according to the Fed’s Beige Book.
- US business activity slowed to a 16-month low in April.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges lower to near 99.60 on Thursday amid mitigating concerns over potential tariff threats by US President Donald Trump.
Businesses dealing with the early stages of Trump’s tariffs are looking for ways to pass increasing costs onto consumers, according to the Federal Reserve’s (Fed) Beige Book report on Wednesday. Companies reported receiving alerts from suppliers about increased prices, and they looked to find ways not to absorb the increases while noting uncertainty over the ability to pass them along to customers. The cloudy US economic outlook triggered by Trump's tariff threats could weigh on the USD against its rivals in the near term.
US Treasury Secretary Scott Bessent said on Tuesday that the ongoing tariff showdown against China is unsustainable, and he expects a “de-escalation” in the trade war between the world’s two largest economies in the near future. However, the Trump administration noted late Wednesday that the US will set tariffs for China over the next two to three weeks, and it depends on China how soon tariffs can come down. Investors will closely watch the developments surrounding US-China trade talks. Any signs of renewed escalation could contribute to the USD’s downside.
Data released on Wednesday revealed that the S&P Global's Flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, eased to 51.2 in April versus 53.3 prior. This figure registered the lowest level since December 2023.
Meanwhile, the Manufacturing PMI rose to 50.7 in April from the previous reading of 50.2, better than the estimation of 49.4. The Services PMI declined to 51.4 in April from 54.4 in March, below the market consensus of 52.8.
On the other hand, the hawkish remarks from the Fed officials might help limit the USD’s losses. Fed Chair Jerome Powell said last week that the US central bank was in no rush to move on interest rates but cautioned Trump's tariff policies risked pushing inflation and employment further from the Fed's goals.
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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