US Dollar Index gathers strength above 97.50 as Trump announces new tariffs
- The US Dollar Index gains ground to near 97.80 in Friday’s Asian session.
- Trump on Thursday announced a 35% tariff on Canadian imports, starting August 1.
- US Initial Jobless Claims declined to 227K last week, a seven-week low.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, edges higher to around 97.80 during the Asian trading hours on Friday after US President Donald Trump announces new tariffs and says that he plans to impose blanket duties of 15% or 20% to the remaining trade partners.
Late Thursday, Trump announced a 35% tariff rate for goods imported from Canada, beginning August 1. Trump said that the 35% tariffs will be separate from all sectoral tariffs, adding that the levies might be increased if Canada continues to retaliate.
Trump's letter to Canada comes after he delivered more than 20 letters to trading partners this week alerting them of the tariff rates that would apply to their exports on August 1, assuming no trade agreements are reached. Trump said that the European Union (EU) would receive a letter notifying them of new tariff rates ‘today or tomorrow.’
“We’re just going to say all of the remaining countries are going to pay, whether it’s 20% or 15%. We’ll work that out now,” said Trump.
Trump on Wednesday also announced plans for tariffs on copper, semiconductors and pharmaceuticals, and imposed a 50% tariff rate on Brazil, one of the highest so far announced for the levies, which will take effect in August.
The lingering threat to inflation from tariffs might convince the US Federal Reserve (Fed) to hold off on cutting interest rates until next year. This, in turn, could provide some support to the Greenback. The markets are now expecting 50 basis points (bps) worth of Fed rate reductions by the end of this year, starting in October.
The US Initial Jobless Claims for the week ending July 5 declined to 227K, compared to 233K in the previous week, the US Department of Labour (DOL) revealed on Thursday. This figure came in lower than the market consensus of 235K. This report suggested that employers may be holding on to workers and showed that there is no urgency for the US central bank to resume its rate reductions, which lift the USD.
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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