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.