US Dollar rebounds modestly but uncertainty looms over long-term prospects
- The US Dollar Index trades near the 100 zone on Tuesday after rebounding from a multi-year low.
- Analysts remain skeptical of any lasting recovery amid growing distrust over erratic trade policies.
- Technical indicators still suggest downside risk unless the DXY clears resistance in the 101.50–101.80 range.
The US Dollar (USD) gains limited ground on Tuesday as the US Dollar Index (DXY) is climbing back to the 100 region during North American trading hours. The index bounced from its recent three-year low amid oversold conditions, but sentiment remains fragile. Although the Greenback posted gains against major peers like the Euro, markets remain wary due to ongoing uncertainty surrounding tariff policy shifts by US President Donald Trump. Traders are also digesting mixed commentary from the Federal Reserve (Fed) and soft economic data, all unfolding during Tuesday’s volatile session.
Daily digest market movers: US Dollar rebounds from deep lows
- DXY rebounded to the 100 zone after plunging to a three-year trough near 99.00, with gains mostly driven by technical correction and oversold conditions.
- Market participants remain unconvinced by the USD’s recovery amid uncertainty triggered by sudden shifts in trade policy, including temporary pauses and new exemptions for some imported goods.
- Analysts flagged that repeated reversals in tariff enforcement are undermining confidence in the US Dollar’s structural appeal, especially as China remains excluded from recent exemptions.
- On the policy front, Fed Governor Christopher Waller voiced support for interest rate cuts if recession risks grow, even as inflation expectations remain elevated.
- Survey data continues to paint a fragile picture, with the University of Michigan Consumer Sentiment Index falling to 50.8 and one-year inflation expectations climbing to 6.7%—levels last seen in mid-2022.
Technical analysis
The US Dollar Index remains in a technically fragile state despite its mild rebound. The Relative Strength Index (RSI) currently sits at 29.82, signaling a potential reversal from oversold territory. However, the Moving Average Convergence Divergence (MACD) still prints a sell signal, suggesting the broader bearish trend is intact. Key moving averages reinforce the downside: the 20-day Simple Moving Average (SMA) is located at 102.97, with the 100-day at 106.26 and the 200-day at 104.71—all sloping downward. The 10-day Exponential Moving Average (EMA) and SMA—both clustered around the 101.50–101.80 region—represent the next major resistance zone. Initial support lies at 99.21. A break above 101.80 would be needed to shift short-term momentum. Until then, the bias remains tilted to the downside.
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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