- The US Dollar Index hits a third consecutive day of losses.
- Israel’s reported plans to target Iranian nuclear facilities raise doubts among traders about Trump’s ability to handle tensions in the Middle East..
- The US Dollar Index slips below 100.00 and heads towards 99.50, testing further downside.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is down by more than 1.5% in just three trading days on Wednesday as markets brace for another playing field of geopolitical tensions. Throughout the week, the USD has already paid the price for the volatile policy swings from the Trump administration, which is facing difficulties on several fronts.
US President Trump apparently no longer has firm control over Israel’s Prime Minister Benjamin Netanyahu. In his tour of the Middle East, Trump announced it was time for a new nuclear deal with Iran and a second chance. However, in late trading hours on Tuesday, CNN reported that Israel considers striking nuclear installations in Iran – something that former President Joe Biden was able to avoid –, and undoes President Trump’s diplomatic efforts from the past few days in the region.
The second front is domestic, with another failure for what Trump calls the “Big Beautiful Bill”. Trump got frustrated with demands to significantly boost the cap on the state and local tax (SALT) deduction, signaling a deadlock in passing a giant tax-cut bill. Trump told lawmakers not to let the SALT deduction or differences over social safety-net cuts impede the bill, but lawmakers from high-tax states and conservative hardliners are still opposed to the bill unless their changes are made, Bloomberg reports.
Daily digest market movers: Headline risks on tax bill
- Republican representative Chip Roy says that still will vote against Trump’s tax bill. This despite efforts from the Speaker of the House of Representatives, Mike Johnson, offering a $40,000 SALT deduction cap agreement. Johnson meanwhile confirmed that the tax bill will be heading towards the floor for a vote, Bloomberg reports
- The weekly Mortgage Applications fell by -5.1% against the previous number at a 1.1% increase the week before.
- Around 16:15 GMT, Federal Reserve Bank (Fed) of Richmond President Thomas Barkin will hold a speech with possible market comments. Fed’s Barkin already spoke earlier this week, saying that it will take several months, even into the summer, before the economic situation and US data stabilizes.. Fed Governor Michelle Bowman will also participate in the event.
- Equities are on the backfoot with US futures are in the red by more than 0.50%.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 5.4%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 26.9%. Recent hawkish comments from Fed officials have reduced the chances of a rate cut in the short term.
- The US 10-year yields trade around 4.53%, cooling down from the steep rally seen on Monday.
US Dollar Index Technical Analysis: Deteriorating quick
The US Dollar Index is cracking under pressure and is starting to look very bleak. In early Wednesday trading, the DXY extended losses below the 100.00 threshold after closing below the substantial floor at 100.22 the previous day, which could lead the index to make a nosedive move. With the recent geopolitical headlines, traders are coming more and more to the conclusion that President Trump might face several substantial setbacks in his term and policy implementation.
On the upside, the broken ascending trend line and the 100.22 level, which held the DXY back in September-October, are the first resistance zone. Further up, 101.90 is the next big resistance again as it already acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. The 55-day Simple Moving Average (SMA) at 101.94 reinforces this area as strong resistance. In case Dollar bulls push the DXY even higher, the 103.18 pivotal level comes into play.
If the downward pressure continues, a nosedive move could materialize towards the year-to-date low of 97.91 and the pivotal level of 97.73. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.