US Dollar softens after Trump administration tries to circumvent inflationary shock
- The US Dollar retraces after sources disclosed the Trump administration is considering a gradual tariff implementation.
- In early Tuesday trading, a knee-jerk reaction briefly pushed inflation and Fed policy concerns to the background.
- The US Dollar Index (DXY) dips below 110.00 and looks for support to bounce back.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower and dips below 110.00 on Tuesday, extending the previous day’s retracement from an over-two-year high of 110.18. The main driver comes after sources in the upcoming President-elect Donald Trump administration disclosed that they are considering a very slow month-to-month implementation of tariffs to avoid an inflationary shock, Bloomberg reported. A second driver comes from headlines of a ceasefire deal brokered by the US between Hamas and Israel, which is supported by both the current US President Joe Biden and President-elect Donald Trump.
The US economic calendar picks up in importance on Tuesday, with the Producer Price Index (PPI) release as an appetizer for the more important Consumer Price Index (CPI) on Wednesday. Overall expectations are that the monthly gauges should soften or stay relatively stable while the year-on-year benchmarks will head higher compared to previous readings.
Daily digest market movers: Starting to thicken
- At 13:30 GMT, the Producer Price Index (PPI) for December is released:
- The monthly core PPI gauge is expected to increase 0.3% compared to 0.2% in November.
- The monthly headline PPI is expected to increase by 0.3%, coming from 0.4% in the previous month.
- The yearly headline PPI is expected to increase 3.4% from 3.0% in November, while the annual core PPI is expected to increase 3.8% from 3.4% in the previous month.
- At 15:00 GMT, Federal Reserve Bank of Kansas City President Jeff Schmid delivers a speech about the US economic and monetary policy outlook at an event organized by The Central Exchange.
- At 20:05 GMT, Federal Reserve Bank of New York President John Williams delivers open remarks at the "An Economy That Works for All: Housing Affordability" event organized by the New York Fed in New York.
- Chinese equities are rallying higher on the back of the rumors of gradual tariff implementation. European equities and US futures are taking over the positive sentiment, with all major indices in the green on the day.
- The CME FedWatch Tool projects a 97.3% chance that interest rates will be kept unchanged at current levels in the January meeting. Expectations are for the Federal Reserve (Fed) to remain data-dependent with uncertainties that could influence the inflation path once President-elect Donald Trump takes office on January 20.
- US yields are softening substantially. The 10-year benchmark trades around 4.753% at the time of writing on Tuesday, fading from its fresh 14-month high of 4.802% seen on Monday.
US Dollar Index Technical Analysis: This will be the new normal
The US Dollar Index (DXY) is set to see volatility pick up. The constant deliverance of statements from President-elect Donald Trump, followed by comments from sources inside his team, will deliver several knee-jerk moments and reactions. This means that sense of direction could get distorted and misty from now on.
On the upside, the 110.00 psychological level remains the key resistance to beat. Further up, the next big upside level to hit before advancing any further remains at 110.79. Once beyond there, it is quite a stretch to 113.91, the double top from October 2022.
Looking down, the DXY will look for a bounce off the green ascending trend line from December 2023, which currently comes in around 109.00 as nearby support. In case of more downside, the next support is 107.35. The next level that might halt any selling pressure is 106.52, with the 55-day Simple Moving Average (SMA) at 106.92 reinforcing ahead of this region of support.
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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