US Dollar retreats as China places tariffs on US goods
- China responded to President Trump’s additional 10% tariff by applying targeted tariffs on US coal and other goods, as well as opening an antitrust case on Alphabet.
- US President Donald Trump agreed to a 30-day suspension on the proposed 25% tariffs on China and Mexico in exchange for border reinforcement.
- JOLTS Job Openings miss expectations, falling to 7.6 million from 8.09 million in November.
- Traders shift focus to the upcoming US NFP report, a key event for Fed’s policy outlook.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, loses momentum on Tuesday after struggling to revisit the 110.00 level and declined below 108.00. Recent developments include President Trump's imposition of a 10% tariff on Chinese imports, while tariffs on Canadian and Mexican goods have been paused for 30 days following negotiations. Investors are concerned that these tariffs could contribute to inflationary pressure within the US economy.
Meanwhile, traders brace for Friday’s US Nonfarm Payrolls (NFP) data, which is expected to shape the Federal Reserve’s (Fed) monetary policy direction.
Daily digest market movers: US Dollar softens after soft economic data, US tariffs paused
- President Trump has agreed to a 30-day suspension of the proposed 25% tariffs on Canadian and Mexican imports. This decision comes after Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum committed to enhancing border security measures to address concerns over illegal immigration and drug trafficking.
- Canada has pledged to deploy advanced technology and additional personnel along its border with the United States. The country will also initiate collaborative efforts to combat organized crime, fentanyl smuggling, and money laundering.
- Mexico has agreed to strengthen its northern border by deploying 10,000 National Guard members to curb the flow of illegal migration and drugs.
- On the data front, JOLTS Job Openings fell to 7.6 million in December, missing the 8 million consensus estimate.
- The US labor market remains stable with total separations little changed at 5.3 million in December.
- Equities push higher as the weaker JOLTS report increases expectations for a Fed rate cut later this year.
- The CME FedWatch Tool projects an 86% chance that the Fed will keep rates unchanged at its March meeting.
- The US 10-year yield climbs to nearly 4.55%, recovering from Monday’s yearly low below 4.50%.
- The upcoming NFP report for January is set to be the key market catalyst for the US Dollar. The overall consensus expects that job creation cooled off slightly in the first month of 2025.
DXY technical outlook: Bearish momentum builds as 108.50 breaks
The US Dollar Index is losing traction with technical indicators reflecting growing downside pressure. The Relative Strength Index (RSI) has dropped below 50, signaling a shift toward bearish momentum. Additionally, the index has slipped below its 20-day Simple Moving Average (SMA) at 108.50, increasing the likelihood of further declines.
If selling pressure persists, the next key support zone lies near 107.80, while resistance remains at 109.00. A sustained move below 108.00 could reinforce bearish sentiment, potentially leading to a deeper correction.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.