- The US Dollar Index sees the previous day’s relief rally pared back in full on Friday.
- Trump hints to tariffs for EU and starts to target domestic companies as well, with Apple’s Iphone facing 25% tariff.
- The US Dollar Index extends losses and is on its way to test a fresh two-week low near 99.14.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, dips further on Friday and erases the previous day’s recovery, trading near 99.20 at the time of writing. The fresh leg lower comes after the House of Representatives passed United States (US) President Donald Trump’s spending bill, now on its way to the Senate. The nonpartisan Congressional Budget Office revealed that this “big, beautiful bill” comes with a hefty price tag: $3.8 trillion in additional debt to the federal government’s $36.2 trillion over the next decade, according to Reuters.
Markets, and indeed the bond market, have been very concerned about these numbers. The best example was the longer-term 30-year Bond, where yields rallied to 5.15% on Thursday from 4.64% at the start of May, a more than one-year high since the 5.18% seen at the end of December 2023. More concerns could devalue the US Dollar even further.
Meanwhile President Trump came out on his social media platform Truth Social by saying that he is considering putting a 50% tariff on EU goods as of June 1st. Apple might face a 25% tariff on its Iphone if the model is not made in the US. Both Apple and EU equities are diving lower on the back of this news.
Daily digest market movers: The approach raises more questions
- United States Secretary of the Treasury Scott Bessent gave further details on President Trump’s comments. Bessent said that the EU was not making enough progress on its talks with the US. The proposals itself from Europea re not that good as from other countries, Bessent said, Bloomberg reports.
- President Trump threatens with a 50% tariff on all EU goods from June 1st and a 25% tariff on Iphones if they are not made in the US, Bloomberg reports.
- At 12:35 GMT, St. Louis Fed President Alberto Musalem participates in a fireside chat with Kansas City Fed President Jeff Schmid at the Heartland Health Institute, Benthoville.
- At 14:00 GMT, April’s New Home Sales data will be released.
- At 16:00 GMT, Federal Reserve Bank Governor Lisa Cook speaks on financial stability at the Seventh Annual Women in Macro Conference.
- Equities are diving lower, with losses over 2% across Europe and over 1% in the three main US indices.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 5.3%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 28.2%. Recent hawkish comments from Fed officials have reduced the chances of a rate cut in the short term.
- The US 10-year yields trade around 4.47%, cooling down from their peak performance earlier this week at 4.62%.
US Dollar Index Technical Analysis: Another bad week
The US Dollar Index is back to square one, flirting with a fresh two-week low at the time of writing near 99.40. With the spending bill now having cleared that first hurdle, the risk of a substantial shock effect in the US debt could further materialise. Even another cut in its credit rating might be under consideration, denting the US image and the US Dollar even further.
On the upside, the broken ascending trend line and the 100.22 level, which held the DXY back in September-October, are the first resistance zone. Further up, the 55-day Simple Moving Average (SMA) at 101.49 is the next level to watch out for, followed by 101.90, a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 103.18 pivotal level comes into play.
If the downward pressure continues, a nosedive move could materialize towards the year-to-date low of 97.91 and the pivotal level of 97.73. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
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.