- The US Dollar Index failed to extend its bounce past 100.50.
- A US court ruling put Trump’s tariffs to the test.
- Investors shift their focus to the US labour market.
The US Dollar (USD) navigated choppy waters this week, briefly hitting new multi-day highs above the psychological 100.00 barrier, just to fade that move almost immediately and end the week in the mid-99.00s, as measured by the US Dollar Index (DXY).
The picture is even gloomier when one looks at the monthly chart, which shows the fourth consecutive month in red, shedding nearly 10% since the tariff-led peaks recorded in early February.
US trade policy has once again dominated the past few days, especially after a US court ruling that challenged the White House’s trade strategy.
In the US bond market, yields traded consolidatively at the short and medium ends of the curve, while the long end declined, reaching multi-day lows.
A separate trade deal between the US and the United Kingdom (UK) had already lifted investor sentiment and given the Greenback a boost. The US-China agreement only added fuel to the rally, reinforcing hopes of easing tensions on the global trade front.
Tariffs, deals, and prospects of a weaker Dollar
So, what was special about this week?
Indeed, on Thursday, US trade policy resurfaced as a US federal court rejected one of Trump’s favourite economic projects, preventing him from imposing wide taxes on imports from practically every nation in the globe.
In a ruling that brings into question the boundaries of presidential power, the Court of International Trade (CIT) ruled that the White House’s emergency law did not provide the president with the authority to act unilaterally on trade. Instead, the New York-based court emphasised that Congress, not the president, has constitutional power to control commerce with foreign countries.
But…
Soon afterwards, a federal appeals court temporarily reinstated the most expansive of his tariffs.
The United States Court of Appeals for the Federal Circuit in Washington ordered the plaintiffs in the cases to reply by June 5 and the government by June 9, pausing the lower court’s judgement to hear the government’s appeal.
So, back to square one.
Returning to fundamentals, it is worth noting that even lower tariffs may have long-term detrimental impacts on the economy. While some of the first price spikes may fade, persistent trade restrictions may continue to raise costs elsewhere, limit consumer spending, and hamper overall growth. Given this context, the Federal Reserve (Fed) may need to reassess its present ’wait-and-see’ strategy if those threats materialise.
While there are still voices arguing the opposite, it is becoming obvious that the White House’s preference is for a weaker currency. Alternatively, how can we expect the Trump administration to reduce the record-high trade deficit swiftly? A plan for a ‘repatriation’ of industries has already been put in motion, although a desirable outcome needs time… and money… plenty of it.
Fed officials urge patience amid inflation uncertainty and trade policy risks
The Federal Reserve maintained interest rates constant on May 7, as anticipated, but warned of increased threats to inflation and employment in the coming months.
In its post-meeting statement, the Fed said that the economy “continued to expand at a solid pace,” but attributed lower first-quarter growth to an increase in imports as firms and consumers tried to front-load purchases ahead of incoming tariffs.
Fed Chair Jerome Powell reiterated his optimistic view of the US economy and said that uncertainty remained high. In addition, he reiterated that future rate decisions will be based on economic facts.
“The outlook could include cuts or holding steady,” Powell said, emphasising the Fed’s more accommodating stance as trade tensions and global concerns weigh on the domestic outlook.
As the Fed weighs its next move, a chorus of voices from within the central bank is calling for caution. With inflation still above target and trade policy creating fresh uncertainty, policymakers are signalling a need to hold steady until clearer signals emerge:
Minneapolis Fed President Neel Kashkari has urged policymakers to keep interest rates steady until the inflationary effects of rising tariffs become clearer. He warned against dismissing the risks posed by supply-side price shocks, noting that sweeping tariffs introduced during President Donald Trump’s administration—and the ongoing uncertainty surrounding US trade policy—present a difficult balancing act for central banks: whether to prioritise inflation control or support economic growth.
Richmond Fed President Thomas Barkin echoed a sense of stability, saying the US economy remains on a familiar path, with low unemployment and inflation gradually approaching the Fed’s 2% goal.
Other officials stressed the importance of clear signals before making any policy adjustments. New York Fed President John Williams underscored the need for central banks to act decisively when inflation deviates from target, warning against missteps that could prove costlier than inaction.
While some policymakers are keeping the door open to rate cuts—San Francisco Fed President Mary Daly said reductions remain possible this year—others struck a more hawkish tone. Dallas Fed President Lorie Logan suggested short-term rates may need to stay elevated for a prolonged period as the Fed continues to evaluate evolving economic conditions.
What’s in store for the US Dollar?
Next week, investors’ attention is anticipated to shift to US employment market announcements, with Nonfarm Payrolls for May emerging as the key event on June 6.
Other indicators to examine are the ISM indices for both the Manufacturing and Services sectors.
Speaking about techs
The US Dollar Index (DXY) is projected to maintain its negative bias while trading below its 200-day and 200-week Simple Moving Averages (SMAs) of 104.09 and 102.86, respectively.
A break above the May high of 101.97 (May 12) might pave the way for a move to the important 200-day SMA, prior to the weekly top of 104.68 (March 26).
If bears take control, the DXY might retest its 2025 bottom of 97.92 (April 21), which precedes the March 2022 floor of 97.68.
Furthermore, momentum indicators have moved their focus to a bearish trend. The Relative Strength Index (RSI) remains close to the 43 level, and the Average Directional Index (ADX) has been losing impulse and hovers near 23, supporting the notion of a moderated strength of the trend.
DXY 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.
