US Dollar under pressure as investors await guidance on Trump's policies
- Traders respond to fresh tariffs comments from President Trump, overshadowing improved investor sentiment in equities.
- The Federal Reserve’s data-dependent stance remains intact, with market consensus leaning toward a possible June rate cut.
- Bond yields hover around 4.60%, a sharp reduction from last week's highs, reflecting changing risk appetite.
- US economic outperformance persists, yet abrupt policy shifts could dent the Dollar’s near-term recovery efforts.
The US Dollar Index (DXY) trades just above 108.00 and flips into losses if more selling pressure arises. Tuesday’s trading was quiet as markets are responding to late-Monday comments from United States (US) President Donald Trump about tariffs on its North American neighbours.
Daily digest market movers: USD sees red despite Trump proposing tariffs on Canada and Mexico
- Equities push modestly higher on Tuesday, with European stocks largely unchanged and US futures up around 0.50%.
- US yields sit near 4.60%, well below last week’s levels; however, President Trump’s sudden trade policy announcements have sparked reversals in currency pairs and risk assets.
- Tariff chatter points to a 25% levy on imports from Canada and Mexico by early February, which immediately pressured the Canadian Dollar (CAD) and Mexican Peso (MXN).
- Strong Dollar narrative endures and many analysts view these trade moves as noise, believing the ongoing rally’s core drivers including the US economic dominance and steady Fed policy as major drivers to the upside for the Buck.
- The Federal Reserve (Fed) media blackout precedes Chair Powell’s press conference on January 29; the market prices July as the earliest date for a single rate cut, contingent on forthcoming data.
- CME FedWatch Tool suggests a near 55% probability of unchanged rates in May, implying a June rate cut if inflation moderates.
DXY technical outlook: Sellers repel attempt to reclaim 20-day SMA
The US Dollar Index broke beneath its 20-day Simple Moving Average near 108.50 and buyers’ efforts to retake that threshold proved unsuccessful. With DXY still hovering around 108.00, a fresh rejection at the 20-day SMA suggests building downside risk. If sellers maintain control, the Greenback could face a deeper pullback despite broader fundamentals pointing to US economic resilience. However, any signs of supportive trade or a shift in Fed expectations might rapidly ignite renewed Dollar demand.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
