- The US Dollar Index reversed two weekly declines in a row.
- Markets’ attention shifted back to the trade front amid renewed tariffs.
- The Fed will likely stay on the sidelines in July.
The week that was
Came July, the US Dollar (USD) saw a resurgence of buying pressure, helping the US Dollar Index (DXY) stage a meaningful rebound from multi-year troughs in the 96.40-96.30 band to levels near the key 98.00 barrier.
Examining the monthly chart reveals a temporary pause in the steep retracement that has been in place since February, but the Greenback remains vulnerable.
Geopolitical tensions have somewhat eased, allowing the trade narrative to once again dominate global markets, driving both sentiment and price action almost exclusively.
Additionally, US yields underpinned the US Dollar’s recovery, maintaining their business in the upper end of the range.
Another factor driving the renewed upbeat tone in the Greenback came from the US calendar, with solid results from key fundamentals that reinforced the view of a resilient economy.
Tariff troubles return
US President Donald Trump signalled a harder stance on trade, reaffirming that a 25% tariff on goods from Japan and South Korea will take effect on August 1, though he left the door open for extensions if countries present alternative proposals. On Monday, Trump publicly shared letters outlining the tariffs via his social media platform.
Trump escalated the situation by announcing a new 50% tariff on imported copper, which will also start on August 1. The move aims to boost domestic production of a material he called critical for the US defence, electronics, and automobile industries.
“This is about national strength and economic independence,” Trump said, echoing past justifications for similar measures in steel and aluminium. Economists, however, warn that such targeted tariffs could feed into broader inflationary pressures and weigh on consumer costs.
Additional trade actions may be forthcoming. Trump told reporters on Tuesday that new tariffs on semiconductors are in the works, along with a separate announcement on pharmaceuticals, though he declined to offer specifics.
The administration also appears to be preparing to involve the European Union (EU). Trump suggested that he could send a formal letter detailing tariff proposals to Brussels by Friday, which could disrupt the ongoing US-EU trade negotiations.
An examination of the topic shows that even a decrease in tariffs might hurt the economy in the long run.
Even while early price increases may be less likely, long-term trade barriers are expected to keep prices high in many sectors, limit consumer spending, and slow down overall economic growth. If these risks come true, the Federal Reserve (Fed) may have to change its present ’wait-and-see’ approach.
Although the talks are still ongoing, evidence indicates that the White House desires a weaker US Dollar. How can we expect the Trump administration to fix the trade deficit, which is at an all-time high, in a timely manner? A plan to bring industries back to the US is in the works, but it will take time and money.
Shrinking bets on a July rate cut
As expected, the Federal Open Market Committee (FOMC) kept its policy rate unchanged at its meeting on June 17 and 18. The announcement, the press conference, and the updated dot plot, on the other hand, got a lot of attention.
When taken together, the signals seemed less aggressive than anticipated, with authorities estimating a potential 50 basis point reduction by the end of the year. The Committee is operating in a climate marked by poor growth projections and a high unemployment rate, offset by a moderately better inflation outlook.
Fed Chair Jerome Powell’s subsequent press conference did not clarify expectations for the two expected interest rate cuts. He maintained a patient tone, stating that the Fed expects tariff-related pricing pressure to manifest in the coming months.
During his semiannual speech, Powell reminded Congress that rising import taxes would contribute to higher inflation this summer, a vital time for measuring the impact of rate reduction. Powell said that President Trump’s tariffs might make things more expensive, which highlights the importance of the Fed maintaining a cautious balance between trade tensions and other global issues.
Only a few officials, according to the Federal Reserve’s policy meeting Minutes, believe interest rates could be cut as early as July. Despite some agreement that easing might be necessary later in the year, most remain concerned about inflationary risks, especially from President Trump’s tariff-driven trade approach.
Despite Trump’s calls for immediate rate cuts and his demand for Jerome Powell’s resignation as Fed Chair, the Minutes show limited support among 19 policymakers for reducing borrowing costs in the near term. The Fed’s dot plot indicates a median expectation of two quarter-point cuts by the end of 2025, while market participants predict a first cut in September and a second in December.
The mood inside the FOMC
This week, Fed rate setters showed they were open to lowering rates and preferred lower rates to help growth or keep things stable.
Federal Reserve Governor Christopher Waller said that the Fed could lower interest rates this month, as money is really scarce right now. Waller makes decisions based on economic research, not political factors.
Mary Daly, the President of the Federal Reserve Bank of San Francisco, also wants rates to go down, although she doesn’t specify when. Daly thinks it’s time to look at whether lower interest rates are still needed to keep the economy stable. She thinks there will be two rate cuts, but she also says there is still a lot of uncertainty.
What’s next for the US Dollar?
The release of the US Inflation Rate for the month of June will take centre stage next week, seconded in relevance by Retail Sales and the flash print of the Consumer Sentiment tracked by the University of Michigan.
In addition, Fed officials are expected to voice their opinions ahead of the blackout period prior to the July 30 meeting.
What about techs?
Once the multi-year low of 96.37 (July 1) is overcome, the index might reach the February 2022 floor of 95.13 (February 4), which is slightly above the 2022 base of 94.62 (January 14).
On the upside, there is an interim hurdle at the 55-day SMA at 98.93, prior to the June ceiling of 99.42 (June 23). The weekly high of 100.54 (May 29) lies north of here, and it surpasses the May high of 101.97 (May 12).
In the meantime, the index is set to continue its downward trend as long as it remains below the 200-day and 200-week Simple Moving Averages (SMAs), which are now at 103.64 and 103.02, respectively.
Furthermore, momentum indicators continue to have a slightly bearish skew. The Relative Strength Index (RSI) has rebounded to nearly 48, while the Average Directional Index (ADX) is declining to 13, suggesting a lack of trend strength.
US Dollar Index (DXY) daily chart
All in all
The US Dollar’s retracement is far from complete.
Despite sporadic flashes of strength, the Greenback is poised to test lower lows amid persistent uncertainty from the White House over trade policy and rising budgetary worries, particularly after Trump’s “Big and Beautiful Bill” became law.
The Federal Reserve may postpone the continuation of its easing cycle, but its data-driven approach may swing between good and negative results, with periodic support for the US Dollar seeming fleeting.
There are no catalysts, at least in the near term, to cause the US Dollar to reverse course and begin a convincing rebound, whether locally or worldwide.
The only way to address the significant US trade deficit is to weaken the currency. President Trump, like all politicians, fully understands this, so expect the US Dollar to suffer as a result.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
