- The US Dollar Index edges lower, while the daily range gets tighter.
- Traders are digesting the spillover risk from the Taiwan Dollar surge on Monday.
- The US Dollar Index remains capped below 100.00, still stuck in a wait-and-see range.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, is tilted to the downside, meanwhile remaining stuck in a very tight range on Tuesday. Market participants are assessing the recent sharp move in the Taiwan Dollar (TWD), which appreciated by more than 5% against the Greenback on Monday before retreating somewhat on Tuesday. Markets are trying to assess if a spillover effect could occur, affecting bigger Asian currencies such as the South Korean Won (KRW), the Japanese Yen (JPY) or the Chinese Renminbi (CNH).
Meanwhile, on the geopolitical front, a swarm of headlines are making its way to the markets, with the most recent the upcoming German Chancellor Friedrich Merz falling short of a majority in the German parliament vote to become the new Chancellor. On the other side of the Atlantic, US Commerce Secretary Howard Lutnick jacked up stakes for the Trump administration to deliver an initial trade deal soon by saying that the first deal needs to be with a “top ten” economy, he said on Fox News. In Europe, the war between Russia and Ukraine is heating up with drone attacks on both sides, while Israel is further preparing a ground offensive with the goal of fully controlling the Gaza Strip.
Daily digest market movers: If even that can not move things
- Mayhem in German Parliament, the Bundestag, this Tuesday where a formal vote to swear in new Chancellor Friedrich Merz was set on the agenda. Though, Merz failed to secure enough votes and apparently already lost trust in his own majority coalition before even becoming Chancellor. A lot of questions arise now in this never-before-seen political impasse. A second vote could take place later this, or either a new Chancellor can be chosen while even new snap elections could be under consideration.
- Newly elected Canadian Prime Minister Mark Carney is on his way to the White House to meet with US President Donald Trump to discuss a possible trade deal.
- At 12:30 GMT, the US Goods and Services Trade Balance for March is due. Expectations are for a wider deficit at $129 billion against the $122.7 billion deficit from February.
- Equities dropped lower across the board on the back of the German political news. The German Dax sinks 1%. US futures are all down as well with the Nasdaq leading the decline, down by 1%.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in May’s meeting stands at 3.2% against a 96.8% probability of no change. The June meeting sees a 31.8% chance of a rate cut.
- The US 10-year yields trade around 4.34%, erasing past weeks’ softening as traders have even priced out the chances for a June rate cut further, with even July starting to look doubtful.
US Dollar Index Technical Analysis: If even that does not get DXY moving
The US Dollar Index (DXY) is facing some headwinds after US Commerce Secretary Lutnick ramped up pressure from within the Trump administration to get an initial trade deal done. Lutnick added that the initial deal should be with a top ten economy, in order to set an example. Despite several claims from US President Donald Trump and several cabinet members that deals are imminent, no real signed trade deals have been announced.
On the upside, the DXY’s first resistance comes in at 100.22, which supported the DXY back in September 2024, with a break back above the 100.00 round level as a bullish signal. A firm recovery would be a return to 101.90, which acted as a pivotal level throughout December 2023 and again as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024.
On the other hand, the 97.73 support could quickly be tested on any substantial bearish headline. Further below, a relatively 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.
