- The US dollar enters the second day of volatile trading with a strong rebound.
- Markets fell after US President Trump confirmed upcoming tariffs on Canada and Mexico in February.
- The US Dollar Index (DXY) is trading higher again with focus on 109.00.
The US Dollar Index (DXY), which tracks the value of the US currency against six major currencies, took a hit on Monday when tariffs were not part of the executive orders signed by Donald Trump in his first hours as US President. Markets were mistaken in believing that the situation on tariffs had eased and would face a widespread delay. However, a surprise comment from US President Trump late Monday night triggered a turnaround with reversals in all major pairs, including the US dollar. President Trump said 25% tariffs on imports from Canada (CAD) and Mexico (MXN) are scheduled to begin at the beginning of February, with devaluations of the Canadian dollar (CAD) and Mexican peso (MXN) as an immediate response. Overall, Tuesday’s reversals speak to Monday’s losses on almost all fronts and asset classes affected by those comments.
Market Movers Daily Brief: The essentials for driving this week
- The US Treasury will release some data this Tuesday in a very empty economic calendar. At 16:30 GMT, 3-month, 6-month and 52-week bills will be allocated to the markets.
- Stocks pare gains on Tuesday. European stocks were flat, while US futures rose near 0.50%.
- The CME FedWatch tool forecasts a 54.2% chance that interest rates will remain unchanged at current levels at the May meeting, suggesting a rate cut in June. Expectations indicate that the Federal Reserve (Federal Reserve) will remain data-reliant with uncertainty that may impact inflation during US President Donald Trump’s term.
- The US 10-year bond yield is trading at around 4.56% and has a long way to recover if it wants to return to last week’s levels near 4.75%.
US Dollar Index Technical Analysis: Recovery Could Become Dangerous
The US Dollar Index (DXY) fell into the hands of bears on Monday, with bulls in control again on Tuesday. However, traders should be aware of some bumps in the road ahead if the DXY returns to 109.00 or higher. With the ongoing rebound on Tuesday, some pivotal upside levels could cause extreme rejection, triggering a dead bounce, trapping USD bulls and pressuring them towards 107.00 and lower.
If this recovery wants to continue its rise, the pivotal level to control is 109.29 (July 14, 2022, high and rising trend line). Furthermore, the next big upside to reach before advancing further remains at 110.79 (September 7, 2022 high). Once above that level, it extends all the way to 113.91, a double top as of October 2022.
On the downside, the first zone to watch is 107.85-107.90, which maintained Monday’s correction. In the event of further decline, the convergence between the October 3, 2023 high and the 55-day SMA around 107.35 should serve as a double safety feature to catch any falling knife.
US Dollar Index: daily chart
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a large number of other countries where it is traded alongside local banknotes. It is the world’s most traded currency, accounting for more than 88% of total global forex trading volume, or an average of $6.6 trillion in transactions per day, according to data from 2022. After World War II, the US dollar took over. The pound sterling is 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 disappeared.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve. The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, which helps the value of the US dollar. When the inflation rate falls below 2% or when the unemployment rate is very high, the Fed may cut interest rates, which affects the dollar.
In extreme cases, the Fed could also print more dollars and activate quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used when credit dries up because banks will not lend to each other (due to fear of the counterparty defaulting). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It has been the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy U.S. government bonds mostly from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding in new purchases. It is usually positive for the US dollar.
