USD: Testing short tolerance levels – ING

The US Dollar’s slide accelerated at the start of the week, driven by two main factors: growing trade uncertainty and rising concerns from bond vigilantes over the US deficit. Yesterday’s ISM manufacturing surveys delivered a negative surprise, reversing the recent trend of resilient US data, ING's FX analyst Francesco Pesole notes.

USD risk premium in the DXY below 98.0 is hard to justify

"The drop in the export gauge to a five-year low may be a signal that retaliatory measures are biting, adding weight to the broader manufacturing complex that is hit by trade policy uncertainty and softer consumption. Today’s spotlight is on April’s JOLTS report, where job openings and layoffs will be scrutinised closely. Durable goods orders for April are also expected to have taken a hit. Another round of soft data, particularly in the labour market, can push the dollar back to its April lows."

"That said, the fragile US bond market remains the bigger story. We see the USD risk premium in the DXY index below 98.0 as hard to justify on weak growth expectations alone — it would likely need further weakness in Treasuries to move lower."

"Trade developments remain crucial. Reports suggest China is gaining leverage over the US through its control of chip supply chains and rare earths. Trump and Xi Jinping are set to speak this week, and past direct talks have sometimes eased tensions. That leaves room for a positive surprise that could help the dollar at some point this week."