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The US dollar index has suffered a harsh reversal this month as some global risks eased. The DXY, which weighs the greenback against a basket of currencies, has dropped to $106.62, down by over 3.25% from its highest level this year. Let’s explore why the DXY index has retreated and what to expect next.
DXY index falls as some global risks eased
The US dollar index has retreated this month after signs emerged that some global risks were easing this year.
The crisis in the Middle East has eased, with Israel and Hamas being in a ceasefire. That has raised the odds that the war could end soon. A ceasefire between Israel and Hezbollah has also remained steady.
There are signs that the war in Ukraine is also about to end as negotiations between Russia and the United States start ahead of a summit between Donald Trump and Vladimir Putin of Russia.
Ending of that conflict would mark a major mark of de-escalation and reduce global risks that have remained since Russia invaded Ukraine in 2022. The US dollar index is often seen as a safe haven when there are global risks.
US tariffs are a big risk
The US dollar index has crashed even as risks surrounding Donald Trump’s tariffs rise. He has already hiked tariffs of Chinese imports by 10% and confirmed that that Mexico and Canadian tariffs will go on next month.
On top of this, Trump has hinted that he will move to levy reciprocal tariffs on most countries.
The implication of all this is that the US is launching a new trade war that will affect the global economy since it is one of the biggest buyers.
Tariffs are expected to make the already-worsening inflation crisis worse in the US. Data released this month showed that US inflation rose to 3.0% in January, continuing a trend that has been going on for months.
Companies will now be forced to raise prices for American consumers, with some products expected to cost up to 25% more. That will lead to higher inflation and slow growth since many consumers will hold on from making purchases.
US dollar index falls as rate cut hopes rise
The US dollar index has crashed as investors anticipate that the Federal Reserve will cut interest rates sooner than expect. In doing this, the Fed will weigh between inflation and economic growth.
These rate cut expectations explain why the US treasury yields have slipped in the past few dats. The ten-year yield has dropped from 4.806% in January to 4.30%, its lowest level since December 12.
Similarly, the 30-year yield has dropped from 5% this year to 4.535%, its lowest level since December. Bond yields fall when there is an elevated sign that the Federal Reserve will cut interest rates.
Looking ahead, the US will publish several important economic numbers on Thursday and Friday, but their impact on the DXY index will be limited. It will release the GDP and the personal consumption expenditure report on Thursday and Friday.
DXY index analysis
DXY chart by TradingView
The daily chart shows that the US dollar index has crashed from the year-to-date high of $110.17 on January 13. It has dropped to $106.70, and is hovering near its lowest level since December 12.
The index has moved below the 50-day and 100-day Exponential Moving Averages (EMA). It has retested the key support at $106.48, the highest swing in April last year.
The DXY index has moved to the 38.2% Fibonacci Retracement point. Therefore, the index will likely continue falling as sellers target the 50% retracement point at $105.17.
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