- US Dollar faces heightened risks politically and economically; investors flock to safe-haven assets.
- Trump’s economic policies and Fed tensions contribute to dollar’s market volatility and depreciation.
- Persisting trade tensions and unpredictable policies accelerate shifts from dollar to other currencies.
- Looking for actionable trade ideas to navigate the current market volatility? Subscribe here to unlock access to InvestingPro’s AI-selected stock winners.
Recently, the US Dollar has been encountering rising risks both politically and economically. The US Dollar Index reached its lowest point in three years, dropping below 98 on the week’s first trading day. This trend indicates that investors are shifting away from the dollar in favor of safe-haven assets.
Tensions Between Trump and Powell Disrupt the US Dollar
President Donald Trump’s threat of impeachment against Fed Chairman Jerome Powell played a major role in the dollar’s depreciation. Trump’s emphasis that Powell’s removal "can’t happen fast enough" is seen as not only a political message but also a challenge to the Fed’s independence. This is priced as a systemic risk by the markets.
The Fed’s decision to keep interest rates unchanged shows that it prioritizes the fight against inflation, while Trump wants a looser monetary policy to support growth. The conflict between these two different approaches increases uncertainties regarding monetary policy.
Political pressure on the Fed is having a profound impact not only on bond markets but also on FX markets. Trump’s aggressive rhetoric is undermining the dollar’s status as a "safe haven". Investors reduced their holdings of US assets in their portfolios and accelerated their shift towards alternative currencies such as euro, Swiss franc and yen.
The dollar index fell from a peak of 110 after Trump’s election victory to 98 today. This decline can also be seen as evidence that Trump is moving away from the precious dollar policy. The "strong dollar" rhetoric advocated by the White House in the past has been replaced by a competitive devaluation strategy. As a result, the Trump administration has begun to move from the precious dollar to the worthless dollar phase in trade wars.
Global Trade Tensions and Volatility
Chicago Fed President Austan Goolsbee’s warned over the weekend that tariffs could have a negative impact on economic activity until the summer months, a statement that also confirmed Fed’s concerns about growth.
Trump’s global trade policies also continue to put pressure on the dollar. In particular, the lack of a concrete negotiation step with China and the inconclusive negotiations with countries such as Japan increase global uncertainty.
In this environment, US multinationals have started to extend the maturities of their foreign exchange hedges. This shows that they are defending against not only short-term but also medium and long-term dollar fluctuations. While some companies have extended their hedge maturities to 2-5 years, this strengthens the comments that the perception of weakness on the dollar is not temporary and is becoming structural.
US Dollar’s Technical Outlook
The dollar started the week at 98.30, down more than 1% due to Trump’s harsh rhetoric against Fed Chairman Powell, and maintained its bearish outlook in the first hours.
The last downtrend in the dollar found support at the 100 level in the last quarter of 2024. In the ongoing process, Trump’s election as US President and the strong dollar perception helped the dollar to rise rapidly against six major currencies. However, Trump’s aggressive growth policy and global tariff plans created serious uncertainty in the short term.
Since the start of the year, the DXY has been declining steadily, recently breaking the psychological support level at 100 and continuing its sharp fall. From a technical perspective, the last upward trend concluded in the Fibonacci expansion area (between Fib 1.272 and Fib 1.618). The downward trend, which began from the 110 peak in January, is now moving towards the Fibonacci expansion area once more, reflecting the most recent rise.
In this scenario, the level of 97.5 (Fib 1.272) will be an important support to watch. If this support level is broken, the downward movement might continue and find a possible endpoint in the 94-97 range. However, if the DXY holds steady around the 97 level, there could be an increase in buying interest, potentially driving it back up toward the 100 level. Despite this possibility, the current technical indicators suggest that the bearish trend is stronger at the moment.
Trump’s Influence on Dollar’s Direction Persists
President Trump remains a key factor influencing the dollar’s direction. As the election period begins, markets are actively factoring in Trump’s economic policies and his attempts to influence the Fed. Despite this, the Fed remains committed to prioritizing price stability and combating inflation over promoting growth.
In this contentious environment, investors are distancing themselves from the dollar, focusing more on the uncertainties within the US economy, even though the Fed is inclined to maintain high interest rates. If this trend persists, the dollar may continue to weaken.
****
Be sure to check out InvestingPro to stay in sync with the market trend and what it means for your trading. Whether you’re a novice investor or a seasoned trader, leveraging InvestingPro can unlock a world of investment opportunities while minimizing risks amid the challenging market backdrop.
Subscribe now and instantly unlock access to several market-beating features, including:
- ProPicks AI: AI-selected stock winners with proven track record.
- InvestingPro Fair Value: Instantly find out if a stock is underpriced or overvalued.
- Advanced Stock Screener: Search for the best stocks based on hundreds of selected filters, and criteria.
- Top Ideas: See what stocks billionaire investors such as Warren Buffett, Michael Burry, and George Soros are buying.
Disclaimer: This article is written for informational purposes only. It is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation or suggestion to invest. I would like to remind you that all assets are evaluated from multiple perspectives and are highly risky, so any investment decision and the associated risk rests with the investor. We also do not provide any investment advisory services.