- The US Dollar Index sees the previous day’s relief rally pared back in full on Friday.
- Trump hints to tariffs for EU and starts to target domestic companies as well, with Apple’s Iphone facing 25% tariff.
- The US Dollar Index extends losses and is on its way to test a fresh two-week low near 99.14.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, dips further on Friday and erases the previous day’s recovery, trading near 99.20 at the time of writing. The fresh leg lower comes after the House of Representatives passed United States (US) President Donald Trump’s spending bill, now on its way to the Senate. The nonpartisan Congressional Budget Office revealed that this “big, beautiful bill” comes with a hefty price tag: $3.8 trillion in additional debt to the federal government’s $36.2 trillion over the next decade, according to Reuters.
Markets, and indeed the bond market, have been very concerned about these numbers. The best example was the longer-term 30-year Bond, where yields rallied to 5.15% on Thursday from 4.64% at the start of May, a more than one-year high since the 5.18% seen at the end of December 2023. More concerns could devalue the US Dollar even further.
Meanwhile President Trump came out on his social media platform Truth Social by saying that he is considering putting a 50% tariff on EU goods as of June 1st. Apple might face a 25% tariff on its Iphone if the model is not made in the US. Both Apple and EU equities are diving lower on the back of this news.
Daily digest market movers: No surprise whatsoever
- United States Secretary of the Treasury Scott Bessent gave further details on President Trump’s comments. Bessent said that the EU was not making enough progress on its talks with the US. The proposals itself from Europea re not that good as from other countries, Bessent said, Bloomberg reports.
- President Trump threatens with a 50% tariff on all EU goods from June 1st and a 25% tariff on Iphones if they are not made in the US, Bloomberg reports.
- At 12:35 GMT, St. Louis Fed President Alberto Musalem participates in a fireside chat with Kansas City Fed President Jeff Schmid at the Heartland Health Institute, Benthoville. Fed’s Musalem said inflation expectations amongst companies and entrepreneurs are on the upside.
- April’s New Home Sales data has seen an increase to 0.743 million units against the previous smaller reading of 0.37 million in March
- At 16:00 GMT, Federal Reserve Bank Governor Lisa Cook speaks on financial stability at the Seventh Annual Women in Macro Conference.
- Equities are diving lower, with losses over 2% across Europe and over 1% in the three main US indices.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 5.3%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 28.2%. Recent hawkish comments from Fed officials have reduced the chances of a rate cut in the short term.
- The US 10-year yields trade around 4.51%, cooling down from their peak performance earlier this week at 4.62%.
US Dollar Index Technical Analysis: Bearish outright
The US Dollar Index is back to square one, flirting with a fresh two-week low at the time of writing near 99.40. With the spending bill now having cleared that first hurdle, the risk of a substantial shock effect in the US debt could further materialize. Even another cut in its credit rating might be under consideration, denting the US image and the US Dollar even further.
On the upside, the broken ascending trend line and the 100.22 level, which held the DXY back in September-October, are the first resistance zone. Further up, the 55-day Simple Moving Average (SMA) at 101.49 is the next level to watch out for, followed by 101.90, a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 103.18 pivotal level comes into play.
If the downward pressure continues, a nosedive move could materialize towards the year-to-date low of 97.91 and the pivotal level of 97.73. 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
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency.
The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
Source: https://www.fxstreet.com/news/us-dollar-extends-losses-amid-us-debt-concerns-202505231208