US Dollar mildly recovers as traders assess fresh tariff talk
- Conflicting White House statements regarding additional levies on Chinese imports create choppy market conditions.
- Investors expect no immediate rate cuts in the first half of the year, aligning with the robust performance of the US economy despite limited Fed official remarks.
- Analysts still attribute the US Dollar’s underlying strength to the US’ enduring economic advantage relative to global peers.
The US Dollar trades flat on Wednesday after two days of losses as the correction aims to continue. Markets are trying to measure the impact of the 10% levy on Chinese goods that President Trump announced on Tuesday. The US Dollar Index (DXY) tests the 108.00 mark and is set to head to the lower end of 107.00. On the Federal Reserve (Fed) side, the bank is in media blackout and with no high-tier economic reports, markets are left with no guidance to bet on the next steps of the data-dependent Fed.
Daily digest market movers: Mixed signals intensify tariff confusion as Fed blackout continues
- President Trump revealed a potential 10% duty on products from China, linking it to broader concerns about fentanyl flows and reiterating that other nations might face tariffs too. This follows earlier rumors that the US administration might hold off on immediate measures, underscoring the contradictory rhetoric.
- Strong US Dollar backdrop remains primarily driven by the US economy’s standout growth despite swirling headlines on trade policy. Analysts suggest that once the tariff fog clears, the US Dollar could reassert its dominance.
- Fed media blackout: Ahead of Chair Powell’s post-decision press conference on January 29, officials have gone quiet. Markets widely predict one rate cut in July, consistent with robust US data.
- Uncertainty around tariffs is heightening volatility, yet currency strategists advise traders to look beyond day-to-day political noise as longer-term US economic momentum remains supportive for the Greenback.
DXY technical outlook: Persistent selling pressure weighs, key levels in play
After bears conquered the 20-day Simple Moving Average (SMA), the outlook turned somewhat bearish as the DXY is now vulnerable to further losses. Should the DXY wish to revive its bullish trajectory, it must overcome 109.30 convincingly.
But failure to defend near-term support levels surrounding 107.50 to 108.00 could spark additional downside. The Greenback’s fundamental posture still leans positive, anchored by economic strength and cautious Fed policy expectations.
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.