The US Dollar Index (DXY) has seen a decline for two consecutive sessions, currently trading around 106.30 during European hours. Demand for the US Dollar remains supported by heightened risk aversion due to increasing global tariff tensions.
On Monday, President Trump signed an order to raise tariffs on Chinese imports to 20%, while similar actions for Mexico and Canada are still under consideration. The US will implement reciprocal tariffs on nations that impose duties on its goods starting April 2.
Canada plans to introduce 25% retaliatory tariffs on US imports if the US tariffs proceed. China’s Commerce Ministry has also indicated it will take necessary countermeasures to protect its interests.
Impact Of Trade Disputes
Despite ongoing trade issues, the US Dollar experiences downward pressure as optimism over a potential peace deal in Ukraine reduces demand for safe-haven assets. Support from European leaders for security guarantees for Ukraine has enhanced global market risk sentiment.
Recent US economic data displayed mixed results. The ISM Manufacturing PMI fell to 50.3, below the forecast of 50.5 and down from January’s 50.9, while S&P Global’s final Manufacturing PMI for February improved to 52.7, surpassing expectations.
Attention is now focused on key US labour data, with the ADP employment report due on Wednesday and the Nonfarm Payrolls report on Friday, both of which could influence the Federal Reserve’s interest rate outlook.
Markets are currently navigating through a number of challenges, each influencing the value of the US dollar in different ways. On the one hand, trade disputes continue to escalate, particularly between the United States and China, with new tariff measures adding layers of uncertainty. Although these tensions typically drive demand for safer assets, the US dollar has lost some strength over the past two days. This suggests that other factors are playing a stronger role in determining its movement.
It is worth noting that the decision to raise tariffs on Chinese imports, now set at 20%, adds further pressure to global trade relations. There is also the possibility that similar measures will be applied to goods from Mexico and Canada, though no final decisions have been announced. Retaliation from both these countries, as well as from China, is expected. Canada has already laid out plans to impose a 25% duty on certain US imports, and Beijing has indicated it will act to protect its interests. This tit-for-tat strategy historically leads to increased volatility in currency markets.
At the same time, geopolitical events in Europe have exerted downward pressure on the dollar. The possibility of a peace deal in Ukraine has bolstered confidence across global markets, reducing the appeal of safe-haven assets. European leaders backing security guarantees for Ukraine have contributed to an improved sentiment, which in turn has weighed on the US currency.
Recent economic data from the US has been mixed. Manufacturing activity, tracked by ISM, showed a slight decline, coming in at 50.3, which was below both expectations and the previous month’s reading. However, S&P Global’s measure of factory activity exceeded forecasts, climbing to 52.7. With figures sending contrasting signals, traders are now looking ahead to upcoming labour market reports.
Market Reactions And Future Outlook
In the next few days, employment data will draw close scrutiny. The ADP report, due Wednesday, provides a measure of private-sector job growth, while the all-important Nonfarm Payrolls report on Friday will carry weight in influencing expectations for Federal Reserve policy. Any signs of continued strength in hiring could reinforce arguments for keeping interest rates higher for longer. Conversely, if figures show a slowdown, the dollar may see further weakness as traders reprice expectations for future monetary policy adjustments.
For those in the derivative space, these events create opportunities for both short-term positioning and longer-term moves. With multiple forces driving the US dollar in opposing directions, caution remains warranted when planning entries and exits. Understanding which elements hold the greatest sway in the moments leading up to key announcements can make all the difference.
