- The US Dollar Index regained some composure and bounced off lows.
- Concerns over the US economy should keep the US Dollar under pressure.
- A de-escalation of US-China trade jitters underpinned the change of course.
The US Dollar finally caught a break after a steep and extended decline.
After shedding roughly 9% from its early March highs, the US Dollar Index (DXY) managed to snap a four-week losing streak, rebounding from troughs just beneath the key 98.00 level (April 21).
The Greenback’s rebound was driven by easing fears over the US-China tariff dispute, coupled with President Trump’s decision to abandon the idea of removing Federal Reserve (Fed) Chair Jerome Powell — a move that had weighed on investor sentiment.
However, the recovery in the US Dollar contrasted with continued weakness in US Treasury yields, which slipped back toward multi-day lows across the curve.
Are tariffs biting back?
There were no fresh announcements regarding the imposition of new tariffs by the White House during the week. However, all the attention shifted to just the opposite: the tangible prospect that President Trump could lower his shocking 145% tariffs on US imports of Chinese goods. The eventual timing of the decision as well as the size of the cut remains, unsurprisingly, unknown so far.
President Trump said he’s ready to lower tariffs on Chinese goods — and claims Beijing’s eagerness for a “fair deal” is the reason. He told reporters Wednesday that trade talks are “active” and moving in the right direction.
The problem? China says none of it is true.
So, looking at the bigger picture: Trump’s sudden tariff shift fits a pattern. Facing market meltdowns, backlash from business leaders, and even rumblings from MAGA-world heavyweights, Trump has been slowly retreating from his most radical economic moves. In fact, he ditched his universal tariff threat after markets tanked, he backed off trying to oust Fed Chair Jerome Powell after signs of investor panic, and he claimed “major concessions” from Canada and Mexico — only for it to emerge that they were mostly cosmetic.
Back to tariffs, it is worth recalling that they could be a double-edged sword: Initial price shocks may be brief, but persistent trade barriers risk fueling a second wave of inflation, dampening consumer spending, crimping growth, and even reintroducing deflationary threats. If the pressure mounts, the Fed may be forced to shift its current cautious stance.
Fed remains prudent, Powell flags rising stagflation risks
The Fed kept its benchmark interest rate unchanged at 4.25%–4.50% during its March 19 meeting, opting for a cautious approach amid mounting market volatility. Officials cut their 2025 GDP growth forecast to 1.7% from 2.1% and slightly raised their inflation outlook to 2.7%, underlining concerns that the economy could be tilting toward a stagflationary scenario.
Fed Chair Jerome Powell struck a measured tone at his post-meeting press conference, saying there is “no immediate need” for further rate cuts. However, he warned that newly imposed tariffs were “larger than expected” and admitted that simultaneous spikes in inflation and unemployment could threaten the Fed’s dual mandate of price stability and maximum employment.
Speaking recently at the Economic Club of Chicago, Powell highlighted early signs of a slowdown, including tepid consumer spending, weakening business sentiment, and a surge of pre-tariff imports that could weigh on economic growth. He reiterated that monetary policy would remain steady as officials monitor how recent economic shocks ripple through the economy.
Federal Reserve officials this week signaled a cautious approach to monetary policy as they assessed the potential economic fallout from the Trump administration’s newly announced tariffs:
Chicago Fed President Austan Goolsbee said that if the effects remained limited to the 11% of the economy tied to imports, the broader fallout could be modest. In addition, Minneapolis Fed President Neel Kashkari echoed the uncertainty, noting it was too soon to judge how tariffs might influence short-term interest rates — a view reportedly shared across the Federal Open Market Committee (FOMC).
Fed Governor Adriana Kugler warned that the tariffs were “significantly larger than expected” and likely to push prices higher, reinforcing the need to keep borrowing costs steady until inflation risks subside. She also flagged the broader influence of the administration’s policies on inflation and employment, while Cleveland Fed President Beth Hammack, said recent market moves did not merit central bank intervention but left the door open to adjusting policy by June if incoming data justified it.
Fed Governor Christopher Waller, meanwhile, argued that it would likely take until the second half of the year to fully understand the tariffs’ economic effects, suggesting no immediate need to shift the Fed’s current monetary policy stance.
Inflation fears mount as Dollar weakens
Mounting concerns over a potential US economic slowdown are weighing heavily on the Greenback, with fears of stagflation, a toxic mix of sluggish growth and stubborn inflation, gaining momentum. The US Dollar’s latest struggles come amid the drag from tariffs, faltering domestic momentum, and a dip in investor confidence.
Inflation continues to run above the Fed’s 2% target, as reflected in latest CPI and PCE data. A surprisingly resilient labour market has complicated the Fed’s path, defying expectations for a sharper economic slowdown.
Meanwhile, consumer inflation expectations are shifting higher. According to the New York Fed’s latest Survey of Consumer Expectations, Americans now anticipate prices to climb 3.6% over the next year, up from 3.1% in February, the highest reading since October 2023. Longer-term inflation expectations, however, stayed steady or edged lower, suggesting that consumers still have faith in the Fed’s ability to eventually rein in price pressure.
For now, the combination of elevated inflation fears, ongoing uncertainty around tariffs, and deteriorating fundamentals is likely to keep the US Dollar under pressure, with volatility expected to remain a dominant market theme in the weeks ahead.
What’s next for the Dollar?
The US labor market will dominate the economic agenda next week with April’s Nonfarm Payrolls report emerging as the key highlight. Additional labour market signals will come from the ADP private payrolls report, weekly Initial Jobless Claims, and the JOLTS Job Openings survey.
Beyond the jobs data, flash estimates of Q1 GDP and fresh readings from the ISM manufacturing and services indices are also expected to keep investors focused on the strength of the US economy.
DXY technical landscape
The bearish outlook for the US Dollar Index (DXY) remains firmly intact, with the index continuing to trade below both its 200-day and 200-week Simple Moving Averages (SMAs), currently at 104.53 and 102.67, respectively.
Key support levels are in focus at 97.92, the 2025 bottom set on April 21, and 97.68, the March 30, 2022 pivot. On the upside, a potential bounce could retest the psychological 100.00 barrier, prior to the interim 55-day SMA at 103.97 and the March 26 high at 104.68.
Momentum indicators reinforce the bearish bias. The Relative Strength Index (RSI) has retreated to around 36, while the Average Directional Index (ADX) has surged above 54, signaling a strengthening downward trend.
DXY daily chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.