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31 Jan 2025
US Dollar consolidates ahead of possible weekend tariffs
- The Dollar Index gains traction, hitting a fresh weekly high above 108.00 as market sentiment deteriorates.
- US Durable Goods Orders disappointed, declining by 2.2% in December, missing expectations for a 0.8% increase.
- Treasury Secretary Scott Bessent proposed gradual tariffs, but Trump pushed for higher, uniform rates, spooking investors.
- Consumer Confidence in January fell to 104.1 from December's 109.5, reflecting growing concerns over the economic outlook.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, extended its gains on Tuesday, consolidating above the psychological 108.00 level. Market sentiment soured after renewed concerns over tariffs and weak US economic data, including lower-than-expected Durable Goods Orders and declining Consumer Confidence. Despite these headwinds, the DXY managed to hold above its recent lows, signaling some resilience.
Daily digest market movers: US Dollar gains despite weak economic data
- Treasury Secretary Scott Bessent proposed incremental tariffs on all US imports, starting at 2.5%, triggering risk aversion in markets.
- President Trump countered Bessent’s suggestion, demanding significantly higher tariffs, further unsettling global financial markets.
- The Conference Board's Consumer Confidence Index fell to 104.1 in January from 109.5 in December, indicating weaker sentiment.
- Durable Goods Orders decreased by 2.2% in December, led by a 7.4% drop in transportation equipment, marking another economic setback.
- Excluding transportation, new orders rose modestly by 0.3%, offering limited optimism amidst broader declines.
- Concerns over overvalued AI shares contributed to a cautious market mood, limiting risk appetite and favoring the US Dollar.
- Investors now flick their eyes to Wednesday’s Federal Reserve decision, where a hold is already priced in.
DXY technical outlook: Resilience above 108.00, correction risks linger
The Dollar Index showed resilience by reclaiming levels above 108.00, bolstered by renewed safe-haven demand. Technical indicators, however, paint a mixed picture. While the RSI remains below 50, hinting at weak momentum, the MACD shows growing flat bars, signaling sustained bearish pressure.
On the bright side, an upward correction could extend if the downward movement becomes overstretched. Immediate resistance lies at 108.50, while a failure to maintain 108.00 could see the DXY index revisiting support near 107.50.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.