US Dollar recovery attempt short-lived after Trump’s softening stance on China, Powell
- The US Dollar gives up earlier gains and trades flat on Wednesday.
- Markets popped after President Trump rebuked earlier stances on China and the Fed.
- The US Dollar Index remains capped below the 100.00 round level.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, trades broadly flat near 99.20 at the time of writing on Wednesday after an earlier attempt to test the 100.00 big figure in early Asian trading. The pop in the DXY came on the back of comments from United States (US) President Donald Trump late Tuesday, saying that he had no intention of firing Federal Reserve (Fed) Chair Jerome Powell, despite being frustrated with the high interest rates. The President also said he would be ‘nice’ to China if they come to the negotiating table, offering an olive branch by promising tariffs on China would be much lower than they are now, Bloomberg reports.
On the economic calendar front, all eyes are on the S&P Global preliminary Purchasing Managers’ Index (PMI) numbers for April. Traders already got a flavor with the European PMI data compiled by S&P Global and Hamburg Commercial Bank (HCOB) released earlier in the day. The mean theme in European core countries is that Services in Germany, France and the Eurozone as a whole fell into contraction and missed expectations across the board.
Daily digest market movers: PMI leading data
- At 13:45 GMT, the S&P Global PMI preliminary data for April is due:
- Services PMI is expected to decline to 52.8, from the previous 54.4.
- Manufacturing PMI is expected to contract to 49.4, coming from 50.2.
- Three Fed speakers are lined up for this Wednesday:
- At 13:00 GMT, Federal Reserve Bank of Chicago President and CEO Austan Goolsbee delivers opening remarks in a virtual presentation at the Federal Reserve Bank of Philadelphia Economic Mobility Summit.
- Near 13:30 GMT, St. Louis Fed President Alberto Musalem delivers remarks at the Fed Listens Event along with Fed Governor Christopher Waller.
- Equities are rallying across the board on the back of the softening stance from US President Trump on China and the Fed. US futures pre-market are up over 2%. The German Dax is outperforming by 3%.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in May’s meeting stands at 4.8% against no changes at 95.2%. The June meeting still has around a 65.4% chance of a rate cut.
- The US 10-year yields trade around 4.34% as US bonds are bid together with equities, which means yields are softening.
US Dollar Index Technical Analysis: Firm rejection in Asian trading
The US Dollar Index (DXY) attempted to regain control at the 100.00 level, though it failed. The whole DXY gains during Asian hours this Wednesday have already been pared back. Although President Trump might have opened the door for negotiations, extended an olive branch to China, markets are clearly seeing it as a sign of weakness from the Trump administration, as they lost control over the stock market with the rout on Monday, having forced the President’s hand to ease off on his harsh stances.
On the upside, the first resistance comes in at 99.58, which has triggered a firm rejection and remains the first level to look at. Should US Dollar bulls resurface, look for 100.22 with a break back above the 100.00 round level as a bullish signal of their return. A firm recovery would be a return to 101.90.
On the other hand, the 97.73 support is very close and could snap at any moment. Further below, a rather thin technical support comes in at 96.94, before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.