US Dollar partially recovers after brief dip on EU tariffs delay
- The US Dollar Index recovers from an early dip in Asian trading on Monday.
- Markets rejoice at the US tariffs delay on EU goods, giving more time to the bloc to negotiate a trade deal.
- The US Dollar Index ticks slightly lower in European trading around 99.00.
The US Dollar Index (DXY), which tracks the performance of the Greenback’s value against six major currencies, ticks slightly lower this Monday after facing some small losses during early trading hours. The index trades around 99.00 at the time of writing. The dip in the Greenback came after the United States (US) President Donald Trump agreed to extend the deadline of the 50% tariffs on the EU to July 9, instead of June 1, when they were supposed to become effective. Overall, a sigh of relief ripples through markets with risk assets emerging as the biggest winners on these developments at the start of the week.
Several traders and analysts are still pointing to persistent issues that remain sticky. The tax bill from President Trump is on its way to be voted on in the Senate, and will add extra pressure on the US debt. With a further ballooning deficit, yields could still rise more, with traders demanding a higher premium for them to buy US debt.
Daily digest market movers: Fed takes it over again
- Speculative traders remained bearish on the US Dollar but trimmed their positioning to $12.4 billion in the week ending May 20 from $16.5 billion in the week prior, according to CFTC data reported Friday, Reuters reports.
- Trump announced he would extend to July 9 the deadline for the European Union (EU) to face 50% tariffs. The decision came after a call between Trump and European Commission President Ursula von der Leyen on Sunday, and should help the EU negotiate a trade deal with the Trump administration, Bloomberg reports.
- The US economic calendar is almost empty on Monday due to the Memorial Day public holiday in the US. Later this week, the second reading for the US Gross Domestic Product of the first quarter is due on Thursday. The Personal Consumption Expenditure data for April is due Friday.
- Equities are rallying in the brief sigh of relief on the US tariffs delay. European equities are surging over 1%, together with US futures.
- The CME FedWatch tool shows the chances of an interest rate cut by the Federal Reserve in June’s meeting are only at a low 5.6%. Further ahead, the July 30 meeting sees odds for rates being lower than current levels at 23.9%.
- The US 10-year yields will not move this Monday as US markets remain closed due to the Memorial Day public holiday.
US Dollar Index Technical Analysis: Recovery to come
The US Dollar Index recovers from daily lows on Monday, with some adventurous bulls coming in to buy the dip, which materialized in early Asian trading. With the Relative Strength Index (RSI) starting to break below 40 and nearing the oversold barrier, some slowdown and even a turnaround in the DXY could take place. The recovery could be short-lived, though, as several macroeconomic issues are still unresolved.
On the upside, the 100.22 level, which held the DXY back in September-October, is the first resistance, followed by the broken ascending trend line near 100.80 on Monday. Further up, the 55-day Simple Moving Average (SMA) at 101.39 is the next level to watch out for, followed by 101.90, a pivotal level throughout December 2023 and a base for the inverted Head-and-Shoulders (H&S) formation during the summer of 2024. In case US Dollar bulls push the DXY even higher, the 103.18 pivotal level will come 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.