The US Dollar Index (DXY), which measures the performance of the US Dollar against six major currencies, has experienced significant fluctuations recently. As of this writing, the most recent report has the index sitting close to 99.40. In what represents a stunning about face from yesterday’s risk-on wave of relief. The US Dollar Index is within reach of a new two-week low. This continuing drop underscores the lingering worries over a secure economy and trade talks.
The market reacted swiftly to various political developments, including President Trump’s recent threats to impose tariffs on European goods and iPhones. These actions have rekindled concerns about trade tensions, especially with China, that have negatively affected the Dollar’s performance in the past. Investors are watching this all very closely as the DXY nears some key support.
Economic Indicators and Market Reactions
The US Dollar Index’s recent downtrend has coincided with a challenged, volatile US Treasury yield. The yield on the 10-year Treasury note is recently trading around 4.51%. Overall, it has moderated considerably since its March 2022 high of 4.62%. This drop in yields can add to the erosion of investor faith in the Dollar, as economic turmoil continues to hover over the horizon.
Traders moved quickly to reevaluate their positions following the strength seen in a Dollar rally on Tuesday. Their resurrected worries over fiscal policy and international trade relations were enough to create an abrupt about-face in sentiment. The index’s trajectory would imply a soon to come test of the support levels near 95.25 and 94.56. If it does, we’ll see lows we haven’t seen since 2022. Analysts warn that if the Dollar were to remain weak for any significant period, it would create additional turmoil in global markets.
The 55-day Simple Moving Average (SMA) at 101.49 is a key factor to the Dollar’s recovery strength. If the index closes above this threshold, it could indicate the beginning of another bullish cycle. On the flip side, if Dollar bears can find momentum, a break below 95.25 might serve to compound bearish sentiment.
Tariff Threats and Political Developments
President Trump has turned America’s trade policy on its head. He threatened to implement a 50% tariff on all European Union products as of June 1st if negotiations do not move in a positive direction. We do know that he’s already gone ahead and designed a 25% tariff on iPhones. This is the case, of course, unless production comes back to the U.S. These proposals have set off alarm bells for economists and market watchers who worry that such a move would draw serious retaliatory action from trading partners.
With Trump’s return to the White House as the 47th President, US-China tensions have further flared. These new tensions add to already heightened existing tariff threats. When Trump was running for election in 2024 he promised to continue with the 60% tariffs on China. This action brings back the broad, aggressive trade policies that defined his first bad administration. This has all fueled fears of a new outbreak of trade wars that would contribute to a more fractured and unstable global economy.
In early 2018, Donald Trump enacted tariffs on China. He pointed to unfair commercial practices and intellectual property theft as his primary justifications for taking the unprecedented action. The US-China Phase One trade agreement was signed in January 2020. That provided a brief respite from escalating hostility. Recent events are showing that these compacts may be under fire once more.
Implications for Investors and Future Outlook
The Dollar’s current trajectory is emblematic of broader economic turbulent waters stoked by partisan political whiplash and global trade war. Please make sure to stay safe as you sail through these choppy seas, investors! The risk of new tariffs would add to already inflationary pressures at home while souring US relations with trading partners abroad.
Market participants are understandably fixated on the next key economic indicators that will help shape plans for Federal Reserve policy moves. Changes in interest rates and monetary policy will play a significant role in determining the Dollar’s strength, or lack thereof, in the future.
First support levels are 95.25 and 94.56. Traders need to prepare for outcomes that could dramatically change market expectations. A close below these levels would signal a reestablished Dollar weakness. It might be the first domino to fall that starts to create systemic change in public investment strategies for all asset classes.