US Dollar rolls through markets after tariff plans threat is back on the table
- The US Dollar bounces higher after the universal tariff plan threat picks up again.
- US President Trump uses the DeepSeek turmoil as proof of the need for higher tariffs.
- The US Dollar Index (DXY) roars back and hits a fresh weekly high at 108.01.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six different major currencies, edges higher in early Tuesday, trading slightly below 108.00 at the time of writing. The Nvidia rout from Monday, where Nvidia (NVDA) lost over $600 billion in market capitalization at one point, played into US President Donald Trump’s hand regarding his plan to impose a universal tariff. Markets even got more shaken up when t Trump advocated for a gradually increasing universal tariff plan, bigger than 2.5%.
On the economic data front, all eyes are on the US Federal Reserve (Fed) and the European Central Bank (ECB), which will announce their first monetary policy decisions this year on Wednesday and Thursday, respectively. Ahead of those monetary policy meetings, preliminary reading for the US December Durable Goods is due later in the day. This will be a good litmus test to see how the US consumer is behaving at the moment ahead of any inflation readings.
Daily digest market movers: US Consumer in focus
- Asian markets will quiet down this week and next. With the Lunar New Year starting this Tuesday, Chinese traders will return to the markets on February 5.
- At 13:30 GMT, December US Durable Goods Orders data is due:
- Headline Durable Goods Orders are expected to increase by 0.8% from -1.2% in November.
- Durable Goods Orders without Transportation are seen rising 0.4% compared to -0.2% in the previous month.
- At 15:00 GMT, the US Conference Board (CB) Consumer Confidence data for January will be released, expected to head to 105.7 from 104.7. Apart from that, the Richmond Fed Manufacturing Index for January should tick up marginally to -8 from -10.
- Equities are recovering from their steep correction seen Monday in the Nvidia (NVDA) rout spillover. Broadly, most European indices are recovering around 0.50%, and US equity futures are positive, with the Nasdaq leading the recovery.
- The CME FedWatch tool projects a 51.2% chance that interest rates will remain unchanged at current levels in the May meeting, with the remaining 48.8% chance of a rate cut that month. 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 4.569% and starts its recovery towards the more-than-one-year high seen earlier this month at 4.807%.
US Dollar Index Technical Analysis: Not without risk
Although the US Dollar Index (DXY) might recover on Tuesday, this does not mean that all downside risk is avoided. Despite its surge back to 108.00, a rejection could occur again, causing the US Dollar Index to fall back to 107.59 or lower. The Relative Strength Index (RSI), which is still below 50, supports that risk possibility as it has more room to move lower before hitting oversold conditions.
The road to recovery is still not done and needs more upside. First, the psychological level of 108.00 must be recovered on a daily close. From there, 109.29 (July 14, 2022, high and rising trendline) is next to pare back last week’s losses. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the 55-day Simple Moving Average (SMA) at 107.59 and the October 3, 2023, high at 107.35 acts as a double safety feature to support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal.
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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