The US Dollar Index (DXY) staged a strong comeback as demand for American assets jumped and as hopes of a Federal Reserve interest rate cut fell. The index, which tracks the dollar’s performance against other popular currencies, rose to $101.65, its highest level since April 10, and up by 3.80% from the lowest point this year. So, is this the end of the USD crash?
US dollar index surges after China trade deal
The DXY Index jumped sharply after the US reached a temporary truce with Beijing about trade. In a statement on Monday, the Trade Secretary Scott Bessent noted that the two countries would lower tariffs for three months to reach a comprehensive trade agreement.
The US has now lowered its tariffs against Chinese goods to 30%, while China has dropped its to about 10%. US tariffs could come lower if China showed more commitment.on fighting the fentanyl crisis.
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The US Dollar Index jumped after the trade truce as investors piled back into American assets like stocks and bonds. US stock indices like the Dow Jones, Nasdaq 100, and S&P 500 soared by 2.8%, 3.25%, and 4.35%, respectively.
Similarly, US bond yields dropped slightly, as demand rose. The 10-year yield dropped to 4.53%, while the 30-year and year yields fell to 4.8% and 4.08%, respectively.
This performance is the exact opposite of what happened when Donald Trump launched his tariffs in April. At the time, the dollar plunged as investors predicted that demand for the greenback would continue falling.
US inflation data ahead
The next key catalyst for the US Dollar Index will be the upcoming consumer inflation data.
Economists expect the data to show that the headline consumer inflation rose slightly in April. The CPI is expected to come in at 0.3%, an increase from the previous month’s drop of 0.1%. They expect the CPI to remain at 2.4% on an annual basis.
The core CPI, which strips the highly volatile food and energy to, is expected to remain unchanged at.2.8% on a YoY basis.
There are signs that some companies have started to add prices to cover their tariff-related margin. For example, companies like Shein and Temu have boosted prices by more than 100% because of the ending of de minimis, a program that allowed them to ship items worth less than $800 without paying any taxes.
Analysts believe that the US and China trade deal will help to lower inflation in the coming month, as companies will now need to only pay 30%. However, inflation will likely remain much higher than where it is today because the US has insisted on maintaining the baseline 10% tariff.
Analysts at Goldman Sachs believe that the US inflation will end the year at 3.8%, much higher than the current 2.4%. As a result, analysts expect that the Fed will not cut interest rates soon.
Rate cuts continue to disappear.
* June 18 (red) now 8% (92% no move)
* July 30 (green) now 35% (65% no move)
No cut is priced until September 17. And even that cut (blue) is disappearing. It was more than 100% ~10 days ago and is now 66% (34% no move) and continuing to fall.
US Dollar Index technical analysis
The daily chart shows that the DXY Index bottomed at $97.95 in April and then rebounded to almost $102 today. It has crossed the important resistance level at $100.15, the lowest swing on September 27.
The ongoing US Dollar Index surge is likely part of the formation of the handle section of the inverse head and shoulders pattern, a popular bearish continuation sign.
Therefore, if this pattern works out, there is a likelihood that the pair will resume the downward trend and retest the year-to-date low of $97.95. A drop below that level will point to more downside, potentially to $95.
The bearish US Dollar Index will become invalid if it rises above the 100-day moving average at $104.23.
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