US Dollar surges as trade war cools and Fed cuts get priced out
- US Dollar Index posts over 1% gain after China and US announce a 90-day tariff truce.
- Fed’s Kugler says assessing economy remains difficult amid trade shifts and household stockpiling.
- US 10-year Treasury yield spikes to 4.45%, supporting USD through widening rate differentials.
- Markets price out 2025 Fed rate cuts as risk appetite surges globally.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, skyrocketed to a one-month high on Monday after China and the United States announced a 90-day pause in their trade war. Both countries agreed to temporarily slash tariffs with the US lowering duties on Chinese goods to 30% from 145% and China reducing tariffs on US goods to 10% from 125%.
This boost to risk appetite sent the Greenback sharply higher, especially against traditional safe havens like the Japanese Yen and Swiss Franc as investors bet on a potential long-term trade agreement.
Daily digest market movers: Next focus on Ukraine
- US Treasury Secretary Scott Bessent confirmed the 90-day tariff reduction agreement with China, easing immediate trade war fears.
- President Trump hinted at further talks with China’s President Xi Jinping later this week, keeping optimism alive.
- The Federal Reserve’s Adriana Kugler warned that sustained tariffs would shift global supply chains and complicate economic forecasting.
- The benchmark US 10-year Treasury yield soared to 4.45%, widening the rate differential and supporting the USD.
- Rate markets have fully priced out Federal Reserve rate cuts for 2025, strengthening the Greenback further.
- The EUR and GBP fell sharply against the USD, dropping 1.5% and 1%, respectively, amid rising US yields.
- Safe haven currencies JPY and CHF underperformed, both losing nearly 2% against the USD on strong risk sentiment.
- Fed policymakers expect rates to stay unchanged at 4.25%-4.50% through June and July, delaying rate cuts until September.
- The market sees a 51.2% probability of the first Fed cut in September, with rates expected at 3.75%-4.00% by year-end 2025.
- Gold prices plunged over $100 per ounce, testing the May lows near $3,200 as safe haven demand weakens.
- WTI crude oil extended its recovery toward $75.00 per barrel, supported by improved global growth prospects.
- Copper remains flat, trading near the midpoint of its recent range despite improved risk sentiment.
- The US economic calendar is light with focus shifting to Tuesday’s Consumer Price Index (CPI) and Thursday’s Retail Sales.
- Fed Chair Jerome Powell is set to speak on Thursday, potentially providing further clues on the central bank’s policy path.
- Market participants now turn their attention to geopolitical developments in Ukraine and the Middle East.
US Dollar Index technical analysis: Chart flashes bullish signals for DXY
The US Dollar Index (DXY) is flashing a bullish signal, trading around 102.00 with daily gains of approximately 1.00%. The index currently sits mid-range between strong support at 100.50 and key resistance near 102.00.
The Relative Strength Index (RSI) hovers in the 50s, signaling neutral conditions, while the Moving Avearge Convergence Divergence (MACD) flashes a buy signal, indicating positive momentum. The Bull Bear Power near 2.00 and the Stochastic %K in the 80s confirm neutral-to-bullish sentiment, alongside a Commodity Channel Index reading of 270.
Short-term moving averages favor buyers with the 20-daySimple Moving Average ( SMA) and both the 10-day Exponential Moving Average (EMA) and SMA clustered around the 100.00 level. However, the longer-term 100-day and 200-day SMAs continue to suggest caution. Immediate support lies at 100.91, 100.88 and 100.73, while resistance is seen at 101.96, 102.08, and 103.43.
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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