The US Dollar Index (DXY) is breaking key support, trading around the 101 level on Thursday. Concerns about the economic fallout from fresh tariff hikes and dovish comments from the Federal Reserve are contributing to a bearish mood in the market. This drop follows a wave of trade barriers that former President Donald Trump intensified in 2018. He wanted to stop shady businesses, especially from China, for stealing our intellectual property. The White House announced an even larger increase, which has raised the effective Chinese tariff rate to 145%. Moreover, they are not yet letting go of a baseline 10% tariff on all imports.
The dollar looks weak as key technical indicators begin turning south. Growing inflationary fears and a hazy labor market picture have only exacerbated matters. With the resurgence of the US-China trade war comes a new wave of complicating factors that could bring great volatility to the world’s supply chains and economic stability.
Tariff Escalation and Market Response
Beginning in 2018, Donald Trump started the first salvo of trade barriers on China. He pointed to theft of U.S. IP and other unfair trade practices as the rationale for his actions. This latest announcement from the White House about increasing tariffs constitutes the highest escalation yet of these punitive measures. The effective tariff rate on Chinese goods has now ballooned up to 145%. At the same time, the baseline rate for all other imports remains flat at 10%.
China played hardball in response to these moves by quickly retaliating with its own tariffs on a range of US products, especially automobiles and soybeans. This seesawing back and forth has thawed already icy relations between the world’s two largest economies further. It has raised concerns about the start of a long-term trade war. Economists have raised alarm that these trade war-related tensions could affect supply chains across the globe. They are concerned this would exacerbate already heightened inflationary pressures.
Market participants have greeted the developments with a measured response. In fact, the US Dollar Index realized its worst one-day loss since 2016 as traders began to price in the consequences of worsening trade tensions. The dollar’s sentiment was undoubtedly bearish. Fading hopes that was a lot of optimism to cash in on, and it struggled to hold most of its recovery gains earlier this week.
Technical Indicators Signal Bearish Outlook
The technical landscape for the US Dollar Index does not provide a comforting picture to investors. Even if it should happen to break above the 101 range, a number of downward-sloping moving averages keep a bearish tone intact. The 20-day simple moving average (SMA) is currently at 103.52. Currently, the 100-day SMA is found at 106.48 and the 200-day SMA at 104.79. While that’s a significant amount of upward momentum, this same alignment points to potential resistance around the 102.30 level.
The Moving Average Convergence Divergence (MACD) indicator gives a ‘sell’ signal indicating very strong downward momentum. Market participants would do well to remain circumspect in the face of this news. The Relative Strength Index (RSI) is hovering around 29, indicating extremely low price strength. It hasn’t quite fallen all the way into deep oversold territory.
At the start of this week, the dollar was making an attempt to come back. Its endeavors failed, owing to persistent fears of inflation and a looming recession. That’s why recent labor market data that sends mixed signals only compounds that uncertainty. Initial jobless claims increased modestly, up 6,000 to 223,000 and continuing claims fell by 26,000 to 1.85 million.
Global Economic Implications
Escalating tariffs are an attack on the technology and manufacturing sectors and have dire consequences that extend well beyond US borders. Trade tensions are wreaking havoc on global supply chains. Those shocks are being directly reflected in Consumer Price Index (CPI) inflation. As a result, prices go up for everyone, consumers and manufacturers alike. Even as the crisis plays out, economists are increasingly cautioning that prolonged inflation will hurt economic recovery and consumer spending.
Against the backdrop of the weakening US dollar, the euro has remained strong in comparison. On Thursday, the EUR/USD pair was very strong and bullish. As the day wore on and selling pressure on the dollar picked up, it overcame the significant level of 1.1200. This divergence emphasizes how geopolitical tensions can lead to contrasting trajectories for other significant currencies in the international market.
Today’s unfolding trade war and tariff escalations are a tragic reminder of how deeply we depend on each other in our global economies. As both nations navigate this complex landscape, market participants must remain vigilant about potential policy changes and their impacts on economic stability.