The DXY index had its worst week in recent memory as it was unable to find conviction at the 100.00 level. Even with attempts to stabilize, the index is still roofed off short of this important threshold, showing signs of falling further yet. To give you an idea of how far it’s fallen, the DXY today is at 95.25. Projections suggest it could hit 94.56, hitting new lows not seen since 2022. The dollar’s rocky year demonstrates that there is a complicated intersection between economic policy and geopolitical tensions.
Former President Donald Trump recently returned to the White House as the 47th US President and reignited discussions surrounding US-China trade relations. Trump promised to put tariffs up to 60% on Chinese products when he is restored. This action is more evidence of an ominous escalation in the multi-front trade war between the two countries. While geoeconomic tensions are rising with ambiguous implications for the US dollar and the global economic landscape, the future is as unpredictable as it is exciting.
The State of the US Dollar Index
The US Dollar Index (DXY) is a key indicator of the value of the dollar. It pits the dollar against a basket of our major foreign competitors’ currencies. Its recent performance has investors and economists very concerned. After peaking near 100.00, the index’s lack of conviction above that level clearly indicates bearish sentiment prevails among sellers. Analysts have warned that a technical rejection may cause the index to fall even further, with support levels already found at 97.73.
The DXY has a key resistance level at 99.58. For the dollar to recover lost ground, it needs to clear this hurdle and restore investor sentiment. A robust recovery would require pushing beyond the 101.90 mark, a feat that appears challenging given current economic indicators and external pressures.
The DXY’s decline is further aggravated by Trump’s hawkish trade policy plans focused on China. His repeated rhetoric on tariffs is highly troubling. As the U.S.-China trade war has escalated, many have begun to question what a renewed trade war would mean for currency values. As Trump moves back into the White House, market participants are especially attuned to how his administration will impact economic policy in the months and years ahead.
Renewed US-China Trade Relations
Few issues captured America’s attention over the past few years like the US-China trade war. Today, it’s poised to start back up again under Trump’s direction where it left off. This time around, Trump is preoccupied with — and rightly so — angle shooting China. He has threatened to use punitive tariffs if these negotiations fail to achieve better results for the United States. His comments on being “nice” to China are an indication of his eagerness to approach them diplomatically. He upholds a hard line on trade.
China has jumped in with retaliation measures, placing tariffs on a host of American products, including cars and soybeans. This tit-for-tat response goes to show just how weakly tethered the trade ties are between the two economic heavyweights. It casts a shadow concerning possible ramifications for international markets.
The Phase One trade deal, which was signed in January 2020, provided a framework of more stable relations. It needed China to admit to its mistakes and make deep structural reforms and maritime shifts in their economic policy. With Trump back and back promising to raise tariffs, the future of that agreement seems likely over. Some analysts believe that any major further worsening of relations will be enough to inflict further damage to collapse the US dollar’s value.
Federal Reserve and Economic Outlook
Even with the rather stormy economic situation, on other occasions Trump has made clear that he does not plan to fire Federal Reserve Chair Jerome Powell. With the Fed at the helm of federal monetary policy during challenging and rapidly changing economic times, continuity is vital. The Federal Reserve’s decisions will be critical in shaping the US Dollar Index and broader market sentiment.
As President Trump lays out his desires for the next four years soon after Inauguration Day, the Fed’s approach will become a hot topic to watch. What has investors keen, however, is the way interest rates and inflationary pressures are likely to combine to transform the currency market. Monitoring targets for growth and inflation, and handling an increasingly uncertain global environment, including potential external shocks, would be necessary to maintain this new equilibrium.
The DXY is now sitting on major support. These market analysts are encouraging all actors to remain alert and watch very carefully what continues to play out within US-China relations and within domestic monetary policy. Political decisions and economic realities will be key. From those seats, they will decide whether the dollar has further to fall or it can recover from its dismal recent performance.