US Dollar Seismic Shift: Greenback in Decline
- The US Dollar is extending its losses on Tuesday, building on a weak performance from Monday.
- Investors are selling off the Greenback following the implementation of US tariffs, which are now facing retaliation from both Canada and China.
- The US Dollar Index (DXY) is struggling to find support and may decline further on Tuesday.
The US Dollar Index (DXY), which measures the US Dollar’s (USD) strength against six major currencies, experienced a brief dip below 106.00 in a volatile trading session on Tuesday. This movement came after US President Donald Trump confirmed that tariffs on goods from Canada, Mexico, and China would be implemented as planned, rather than delayed. Even though markets had held onto some hope on Monday that President Trump might grant an extension just before the deadline, the US proceeded with the previously announced tariffs, which ultimately came as no real surprise.
Meanwhile, both Canada and China have already responded to these US tariffs. Late Monday, Canadian Prime Minister Justin Trudeau announced retaliatory tariffs on US products. According to the statement, “Canada will begin applying 25% tariffs on C$30 billion worth of US imports starting Tuesday,” and tariffs on an additional C$125 billion of products are scheduled to take effect in 21 days.
Early Tuesday, China also announced its own tariffs targeting US agricultural goods. China’s Commerce Ministry stated they would impose additional tariffs of up to 15% on key farm imports from the US, including chicken, pork, soy, and beef. These tariffs are set to be implemented on March 10th, as announced by the Ministry.
Daily market digest: Key headlines moving the markets
- US Treasury Secretary Scott Bessent suggested that US interest rates are likely to decrease again, expressing confidence that Chinese manufacturers will “absorb” the impact of the tariffs.
- Recent US economic data, despite weakening US yields and the US Dollar, indicate a potential slowdown or even negative growth for the US economy, while inflation remains high due to tariffs. Bloomberg reports this combination creates a challenging economic environment, potentially leading to recession or stagflation in the US.
- The TechnoMetrica Institute of Policy and Politics (TIPP) Economic Optimism Index for March fell below the crucial 50 mark to 49.8, missing expectations of 53.1 and declining from February’s 52.
- Around 18:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin is scheduled to speak on “Inflation Then and Now” at the Fredericksburg Regional Alliance in Fredericksburg, USA.
- Around 19:20 GMT, Federal Reserve Bank of New York President John Williams is expected to participate in a discussion titled “The Cautious Path for Rate Cuts” at Bloomberg Invest 2025 in New York, USA.
- Stock markets are experiencing widespread selling pressure, with a broad flight to safe-haven assets currently driving investors towards Gold.
- The CME Fedwatch Tool indicates a 14.4% probability that interest rates will remain unchanged in the 4.25%-4.50% range in June, with the majority of projections pointing towards a potential rate cut.
- The US 10-year Treasury yield is currently trading around 4.11%, continuing its decline from last week’s high of 4.574% and approaching a five-month low.
US Dollar Index Technical Analysis: A significant shift in momentum
One thing has become very clear: both US yields and the US Dollar Index (DXY) are reacting negatively to the imposition of tariffs. The growing risk of further tariffs and retaliatory measures from various countries could put even more pressure on the US Dollar, especially as the prospect of stagflation in the US economy becomes more prominent. As the interest rate gap between the US and other nations continues to shrink, the US Dollar’s strength is likely to weaken further, potentially pushing the DXY below 105.00 if current market sentiment persists.
Looking at potential upside, the 100-day Simple Moving Average (SMA), currently around 106.87, serves as the initial resistance level to watch for any potential price rejections. Should the DXY manage to break above 107.35, the key 108.00 level comes back into focus, with the 55-day SMA situated just below it.
On the downside, the 106.00 level needs to hold firm as support. If this significant level breaks down, the next potential support areas to consider are 105.89 and the 200-day SMA at 105.05.
Fed FAQs
The Federal Reserve (Fed) shapes US monetary policy. The Fed operates under a dual mandate: to maintain price stability and promote full employment. Its primary tool for achieving these objectives is adjusting interest rates. When prices rise too rapidly and inflation exceeds the Fed’s 2% target, it responds by raising interest rates. This increases borrowing costs throughout the economy, strengthening the US Dollar (USD) by making the US a more attractive destination for international investors seeking returns on their capital. Conversely, when inflation falls below 2% or the unemployment rate is excessively high, the Fed might lower interest rates to stimulate borrowing, which typically puts downward pressure on the Greenback.
The Federal Reserve (Fed) convenes eight policy meetings annually. During these meetings, the Federal Open Market Committee (FOMC) evaluates the current economic landscape and makes decisions regarding monetary policy. The FOMC comprises twelve voting members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the remaining eleven regional Reserve Banks, who serve staggered one-year terms.
In extraordinary circumstances, the Federal Reserve may employ a policy known as Quantitative Easing (QE). QE involves the Fed significantly expanding credit availability within a constrained financial system. This non-conventional policy tool is deployed during times of crisis or when inflation is exceptionally low. QE was the Fed’s primary response during the Great Financial Crisis of 2008. It entails the Fed creating more US Dollars and utilizing them to purchase high-grade bonds from financial institutions. Typically, QE has the effect of weakening the US Dollar.
Quantitative tightening (QT) is the opposite of QE. In QT, the Federal Reserve ceases purchasing bonds from financial institutions and stops reinvesting the principal payments from maturing bonds to buy new ones. QT generally has a positive impact on the value of the US Dollar.
