- The Greenback edges lower against most major currencies as US tariffs impact markets.
- Equities sink with China lashing back at US, Bessent warns China not to devalue its currency.
- The US Dollar Index is on the backfoot, though it starts to recover during the European session.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, extends the previous day’s correction and hovers around 102.30 at the time of writing on Wednesday after testing the 102.00 level in the early Asian session. The tariffs that United States (US) President Donald Trump introduced on Liberation Day are going to take effect this Wednesday. Meanwhile, China and Canada have already vowed to retaliate against these tariffs with countermeasures, increasing fears of a global economic slowdown.
On the economic calendar front, some light data is set to be published on Wednesday ahead of the Federal Open Market Committee (FOMC) Minutes for the Federal Reserve (Fed) monetary policy meeting in March. However, not much is expected from the Minutes, as Fed Chairman Jerome Powell said last week that the central bank will be in a “wait-and-see” mode. Meanwhile, markets are piling in for more interest rate cut bets by the Fed in 2025.
Meanwhile as Wednesday advances, the Chinese Finance Ministry has issued counter-tariffs on all US goods at 84% as of the 10th of April. United States Secretary of the Treasury Scott Bessent was quick to respond after the Chinese communication. Bessent said that China will be the only losing nation in this tariff war, they should better come to the table to negotiate, Bloomberg reports. The secretary also warned China on devaluing its currency, that it will not be able to circumvent these tariffs by doing just that.
Daily digest market movers: Fed Minutes to leave markets clueless
- China has issued comments that it is set to impose a near 84% tariffs on all US goods starting 10th of April, Bloomberg reports.
- At 11:00 GMT, the Mortgage Bankers Association released its weekly mortgage application numbers. The actual number was a firm jump of 20% in comparison to the previous number of -1.6%.
- At 14:00 GMT, the February Wholesale Inventory data is due. Expectations are for a steady 0.3% growth.
- AT 16:30 GMT, Richmond Fed President Thomas Barkin will speak at the economic club in Washington.
- At 18:00 GMT, the FOMC Minutes from their last meeting in March will be released.
- Equities are sinking lower again after China retaliated on US tariffs. All major equities are down at least 2% on average on the day.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in May’s meeting surging to 53.5%, compared with only 10.6% a week ago. For June, the chances of lower borrowing costs are 100%, with 55.2% anticipating a 50 basis point (bp) rate cut.
- The US 10-year yields trade around 4.45%, and keeps rallying higher while the Fedwatch tool is seeing more rate cut bets being priced in.
US Dollar Index Technical Analysis: Wake me up until data comes in
The US Dollar Index (DXY) dipped lower earlier this Wednesday and looks to be bouncing off a pivotal support at 101.90 for now. The question remains, though, that with these tariffs and once US economic data start to turn, the DXY might see more selling pressure come in. That could mean a further weakening of the Greenback in the coming weeks or months, even as the impact of these tariffs will only start to be priced in now.
Looking up, the first level to watch out for is 103.18, which supported the DXY in March and has now become a strong resistance. Above there, the 104.00 round level and the 200-day Simple Moving Average (SMA) at 104.85 come into play.
On the downside, 101.90 is the first line of defense, and it should be able to trigger a bounce as it has been able to hold the recent bearish momentum last week and did its duty again earlier this Wednesday. Maybe not on Wednesday, but in the coming days, a break below 101.90 could see a leg lower towards 100.00.
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.