US Dollar Index breaks below 106.50 despite risk-off sentiment due to global tariff fears
- The US Dollar Index may find support as escalating global tariff tensions drive increased risk aversion.
- The White House confirmed that President Trump signed an order to implement 20% tariffs on Chinese imports.
- The US Dollar faces downward pressure as optimism over a potential Ukraine peace deal dampens demand for safe-haven assets.
The US Dollar Index (DXY), which measures the US Dollar (USD) against six major currencies, extends its losses for the second successive session, trading around 106.30 during the European hours on Tuesday. However, the downside of the DXY may be contained as improved risk aversion, fueled by escalating global tariff tensions, supports the demand for the safe-haven Greenback.
The White House confirmed on Monday that President Trump signed an order increasing tariffs on Chinese imports to 20%, though similar measures for Mexico and Canada remain pending. Trump also reiterated that reciprocal tariffs would take effect on April 2 for nations imposing duties on US goods.
In response, Canada’s Prime Minister’s Office stated that the country would implement 25% retaliatory tariffs on US imports starting Tuesday if US tariffs proceed. Meanwhile, China’s Commerce Ministry announced early Tuesday that it would take “necessary countermeasures” to protect its legitimate rights and interests.
Despite trade tensions, the US Dollar faces downward pressure as optimism surrounding a potential Ukraine peace deal reduces demand for safe-haven assets. European leaders have expressed support for security guarantees for Ukraine, boosting risk sentiment in global markets.
US economic data on Monday provided mixed signals. The ISM Manufacturing PMI declined to 50.3, falling short of the 50.5 forecast and down from January’s 50.9. However, S&P Global’s final Manufacturing PMI for February exceeded expectations at 52.7, improving from its preliminary reading.
Market participants now turn their attention to key US labor data, with the ADP employment report set for release on Wednesday and the Nonfarm Payrolls report on Friday. These figures could offer further insights into the Federal Reserve’s interest rate trajectory.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
