The US Dollar Index (DXY) is holding onto the bulk of its recent gains, still near a two-week high. It remains firm though, challenging key resistance levels from 97.80 up to 98.00. Traders are closely watching the index, which measures the value of the US Dollar against a basket of six major currencies, as it reflects broader market sentiments amid renewed trade tensions.
To start the week, the US Dollar had a bullish bias thanks to last week’s performance. Nonetheless, a more dovish note came through from investors which saw the Dollar pull back modestly. Speculators are betting big with the growing protectionist trade language coming out of the White House. In particular, their gaze is directed under President Donald Trump’s latest threat of future tariffs on the European Union and Mexico.
Trade Tensions Escalate
President Trump issued a series of warning letters to both the EU and Mexico, threatening to impose sweeping new tariffs starting August 1. These proposed duties would go up as high as 30%, making a years long pressure campaign on US International Trade Relations even more acute.
Trump explicitly connected his tariff threats to matters in and about fentanyl trafficking, which he alleges Mexico is not actively controlling. He stated, “Mexico still has not stopped the cartels who are trying to turn all of North America into a Narco-Trafficking Playground.” We therefore oppose using tariffs as a bargaining chip in trade negotiations. Through this lens, we begin to see just how the present administration has been combining economic policy with political strategy.
As recently as last week, Mexico’s president and new presumptive presidential candidate Claudia Sheinbaum condemned the proposed tariffs. She described them as “unfair and counterproductive,” indicating that her country would respond strongly to any perceived unilateral, unjust economic pressure. Indeed, the ongoing tensions between the two nations may further exacerbate market volatility, which in turn could feed into the Dollar’s performance over the following weeks.
Market Reactions and Expectations
Addressing the current geopolitical tumult aside though, the technical setup does indicate that DXY could be poised to break out again. The Moving Average Convergence Divergence (MACD) on daily chart has retaken the positive territory, showing a bullish momentum build-up. If the market spends each day closing above the upper boundary of the new wedge pattern, we’ll have strong confirmation that we’re in a new bull market. Breaking the psychological level of 98.00 would strengthen the bullish argument for continuation higher.
Market analysts are watching inflation closely. Expectations are for both the overall and core rates of inflation to increase by about 0.3% m/m. This possible re-acceleration in inflation would weigh on current Fed policy considerations and affect dollar values.
His hardline, inflationary tariff policy should not be overlooked as a driver of inflationary pressures either. He recently stated, “Whatever the number you choose to raise them by will be added onto the 30% that we charge,” suggesting that any increase in tariffs could further escalate costs for consumers and businesses alike.
Economic Implications
As always, market sentiment is being driven by the latest trade tensions. Economic advisers within the Trump administration are reportedly pulling out every legal stop in their push for unorthodox monetary policy. Chief economic advisor Kevin Hassett confirmed that officials are examining whether President Trump has the authority to remove Federal Reserve Chairman Jerome Powell from his position. This new consideration comes from more than a decade of concern about fiscal mismanagement and the diminishing returns of monetary policy.
The broader economic picture is still very much up in the air as traders continue to process waffling signals from both here at home and globally. US Dollar looks strongly resilient yet its capacity to continue building momentum is inextricably tied to outside forces such as the political landscape and macroeconomic trends.