- The US Dollar Index dropped to fresh multi-year lows.
- The ‘sell America’ mood remained well in place this week.
- The Fed is largely anticipated to keep its interest rate unchanged on June 18.
This week, the US Dollar (USD) experienced increased selling pressure, momentarily slipping back to the 97.60 zone for the first time since March 2022 before retracting and concluding the week around the 98.00 neighbourhood, according to the US Dollar Index (DXY).
The monthly chart presents a stark picture, revealing the fifth consecutive month marked in red, with a decline of more than 11% since the YTD peaks observed in mid-January.
Recently, US trade policy has gained prominence, especially after a positive two-day discussion in London between US and Chinese officials.
The US bond market saw yields exhibit an erratic trend across the curve, with the ‘Sell America’ theme remaining prominent.
However, investors’ flight-to-safety behaviour returned to the markets on Friday in response to heightened geopolitical fears after Israeli attacks on Iran.
Trade deals still remain to be seen
In the wake of the London talks, President Donald Trump announced that the US–China agreement was “done”, following a debate between officials from Washington and Beijing, who reached a framework to renew their trade ceasefire. According to him, Beijing has committed to supplying magnets and rare earth materials as a component of the agreement.
Furthermore, the White House has announced that the agreement allows the United States to impose a 55% tax on goods imported from China. The proposal outlines a 10% “reciprocal” tax, a 20% tax specifically targeting fentanyl trafficking, and a 25% tax on existing trade barriers. In response, China plans to impose a 10% tax on imports from the United States.
So, what’s next on the tariff agenda?
June 15 to 17
President Trump is set to participate in the upcoming annual summit of G7 nations in Kananaskis (Alberta, Canada), where tariffs are anticipated to dominate the agenda.
July 8
Tariffs associated with “Liberation Day” are set to be implemented after a 90-day suspension period, which could have implications for imports from various nations.
July 9
The United States and the European Union (EU) face a critical deadline to negotiate a deal that could prevent a 50% tariff duty on all imports from the EU.
July 14
The EU’s 90-day suspension of its retaliatory tariffs is set to conclude.
Observing the broader economic landscape, it is important to highlight that even reduced tariffs could lead to adverse long-term effects on the economy.
In fact, although initial price increases may diminish, ongoing trade restrictions are likely to sustain elevated costs in other areas, restrict consumer spending, and impede overall economic growth. In light of this context, the Federal Reserve (Fed) may be compelled to reevaluate its current ‘wait-and-see’ approach should those threats come to fruition.
Despite ongoing disagreements, it is increasingly clear that the White House favours a weaker currency. How can we anticipate that the Trump administration will address the record-high trade deficit promptly? A strategy for the ‘repatriation’ of industries is currently underway, yet achieving a favourable result will require significant time and substantial financial resources.
Fed to remain cautious, although the recent disinflationary trend…
The Federal Reserve is widely expected to keep its Fed Funds Target Range (FFTR) unchanged at 4.25%-4.50% at its June 17-18 meeting.
However, the recent lower-than-expected inflation figures from the Consumer Price Index (CPI) and the Producer Price Index (PPI), along with the ongoing cooling of the domestic labour market, raise the question of whether the Fed will adopt a more dovish stance in its statement and updated ‘dot plot’ or maintain its current cautious tone.
Let’s take a look at the latest comments from many Fed rate setters as well as their likely bias:
- Raphael Bostic (Atlanta Fed) has made headlines recently. The tone remains impartial and objective.
The outlook suggests a tendency for patience, with expectations of only a single modest cut this year, while maintaining a cautious stance on further easing measures.
- John Williams (New York Fed) is known for his hawkish stance.
The policy is described as “appropriately restrictive”, with a clear readiness to respond decisively should inflation shift from its expected trajectory.
- Alberto Musalem (St. Louis Fed) maintains a neutral stance.
It is cautioned that uncertainty could hinder growth, yet there is no explicit call for either tighter or looser policy measures.
- Beth Hammack (Cleveland Fed) and Mary Daly (San Francisco Fed) maintain a neutral stance.
There is a consensus advocating for a cautious approach, suggesting a ‘wait-and-see’ strategy until the trade uncertainty is resolved, avoiding any calls for cuts or increases.
- Christopher Waller (FOMC Governor) has adopted a dovish stance.
A clear path to potential “good-news” rate cuts later in the year is anticipated, contingent on the temporary nature of tariff effects.
- Neel Kashkari (Minneapolis Fed) is known for his hawkish stance on monetary policy.
There are calls to maintain interest rates in order to thoroughly assess the inflationary effects of tariffs, emphasising the importance of price stability over prioritising growth support.
- Thomas Barkin (Richmond Fed) has expressed a neutral stance
He indicated that the economy is progressing as expected. He noted that officials are currently waiting for definitive signals before making any adjustments to policy.
- Austan Goolsbee (Chicago Fed) has been assessed as neutral.
The analysis highlights the sequence in which tariffs influence inflation before impacting growth, while refraining from advocating for prompt measures.
- Lisa Cook (FOMC Governor) is characterised by a hawkish stance.
Maintains that all options, including rate hikes, remain under consideration until the uncertainties surrounding tariffs are clarified.
- Adriana Kugler (FOMC Governor) maintains a neutral stance.
She monitors the potential tightening of the labour market due to decreased immigration. She has not yet endorsed any policy changes.
- Lorie Logan (Dallas Fed) has adopted a neutral-to-dovish stance.
The individual advocates for a return to a straightforward 2% targeting approach, expressing a willingness to remain patient while also being prepared to take action if necessary.
- Patrick Harker (Philadelphia Fed) has made headlines recently. His views are considered impartial.
A resilient economy is observed; however, effective policy direction remains elusive without clearer signals from the evolving priorities in Washington.
What’s next for the US Dollar?
Next week, investors will focus primarily on the updated ‘dot plot’ rather than the Federal Reserve’s interest rate decision itself. Investors will closely scrutinise the tone of the bank’s statement and, crucially, the message delivered by Chair Jerome Powell during his press conference.
What techs are saying
The US Dollar Index (DXY) is expected to continue its downward trend as it remains below the 200-day and 200-week Simple Moving Averages (SMAs), currently at 103.97 and 102.92, respectively.
Should bearish trends gather impulse, DXY could potentially revisit its 2025 low of 97.60 recorded on Friday. If the DXY experiences further weakness, it should aim for the February 2022 trough at 95.13 (February 4), which is just above the 2022 floor of 94.62 (January 14).
On the flip side, initial resistance emerges at the weekly peak of 100.54 (May 29), prior to the May high of 101.97 (May 12). North of here, the significant 200-day SMA should start emerging on the horizon ahead of the weekly top of 104.68 (March 26).
Additionally, momentum indicators have shifted their attention towards a bearish trend. The Relative Strength Index (RSI) is currently positioned near the 39 mark, while the Average Directional Index (ADX) shows a decline in momentum, resting above 17. This development suggests a weakening trend strength.
DXY daily chart
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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