- Equities plunge, Bond prices spike and Gold surges to new all-time high ahead of Trump’s reciprocal tariffs.
- US President Trump confirmed on Sunday that all countries will be targeted.
- The US Dollar Index trades stable around 104.10, with no safe-haven flows in the Greenback.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades flat on Monday and sees traders not placing positions in the Greenback. The DXY is completely left in the dark while Equities are selling off, Bond prices are spiking higher, and Gold has hit a fresh all-time high above $3,100 earlier in the day. The move comes after United States (US) President Donald Trump reiterated on Sunday at Airforce One that all countries will fall under reciprocal tariffs on Wednesday’s ‘Liberation Day’, Bloomberg reports.
One thing that became clear last week is that the US Dollar (USD) is moving depending on US economic data, and fears of stagflation or recession are weakening the Greenback. Thus, Monday’s focus will shift to March’s Chicago Purchase Manager’s Index and the Dallas Fed Manufacturing Business Index. Contractions and slow downs in those economic data points could trigger another leg lower in the DXY.
Daily digest market movers: Stagflation or Recession?
- At 13:45 GMT, the Chicago Purchase Manager’s Index (PMI) will be released. Expectations are for 45.4, just one tick lower from the previous 45.5.
- At 14:30 GMT, the Dallas Federal Reserve (Fed) will release the Manufacturing Business Index for March. No forecast is available, with the previous reading at -8.3.
- Equities are diving lower with losses between 1.0% to 2.0% crossing from Asia over Europe and into US futures.
- According to the CME Fedwatch Tool, the probability of interest rates remaining at the current range of 4.25%-4.50% in May’s meeting is 82.1%. For June’s meeting, the odds for borrowing costs being lower stand at 81.2%.
- The US 10-year yield trades around 4.20%, a substantial drop lower and the reason why the Fedwatch Tool sees elevated chances for a rate cut in June.
US Dollar Index Technical Analysis: Trading regime changed
The US Dollar Index (DXY) provided an answer last week and this Monday to one question that was on traders’ minds. Tariffs clearly do not impact the US Dollar. Instead, the US economic data looks to be impacting the Greenback, as seen on Friday with the University of Michigan Consumer Sentiment and elevated inflation expectations reading, which pushed the US Dollar lower. The recession or stagflation fear no longer supports a stronger US Dollar, and more evidence of stagflation could push the DXY lower from here.
A return to the 105.00 round level could still occur in the coming days, with the 200-day Simple Moving Average (SMA) converging at that point and reinforcing this area as a strong resistance at 104.94. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, could limit the upward momentum.
On the downside, the 104.00 round level is the first nearby support, although it looks bleak after being tested on Friday and again this Monday. If that level does not hold, the DXY risks falling back into that March range between 104.00 and 103.00. Once the lower end at 103.00 gives way, watch out for 101.90 on the downside.
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.
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