Trump’s Tariff “Atomic Bomb” Sends US Dollar Tumbling
Teh U.S. Dollar Index (DXY), a measure of the dollar’s strength against six major currencies, is reeling. On Thursday, it plummeted after former U.S.President Donald Trump seemingly proposed a sweeping set of reciprocal tariffs, rattling global markets already on edge. Concerns over potential global trade wars and the impact on the U.S. economy sent investors fleeing from the dollar and U.S.equities.
The proposal, reportedly involving a base 10% tariff on all goods imported into the U.S., with additional levies imposed on specific countries, hit the markets hard. China, for example, could face a cumulative tariff of 54% when pre-existing tariffs are factored in. Such a move would dramatically reshape global trade flows and possibly ignite retaliatory measures from other nations.
The immediate market reaction was swift and decisive. “The US Dollar is being kicked out of portfolios while investors repatriate cash as they sell their stakes in US Equities amidst a harsh correction globally.” This quote encapsulates the risk-off sentiment that gripped traders on Thursday, driving the DXY below the critical 102.00 level and even testing 101.50.
| Potential Tariff Impact | Description |
|---|---|
| Base Tariff | A 10% tariff on all goods imported into the U.S. |
| China’s Total Tariff | Potentially 54% when combined with existing levies. |
| Market Reaction | Sharp sell-off in the U.S. dollar and equities. |
| Investor Sentiment | Flight to safety, repatriation of capital. |
Economic Data Adds to the Gloom
Adding to the market’s woes, a series of economic reports painted a mixed picture of the U.S.economy. While initial jobless claims came in slightly better than expected at 219,000, versus an estimate of 225,000, continuing claims jumped to 1.903 million, exceeding the previous 1.856 million. This suggests that while fewer people are initially filing for unemployment, those already unemployed are having a harder time finding new jobs.
More concerning was the Institute for Supply Management (ISM) Services report for March. The Services PMI, a key indicator of economic health, fell sharply to 50.8, significantly missing the estimate of 53.0. The Employment component of the report contracted sharply, hitting 46.2, a clear sign of weakness in the services sector, which accounts for a meaningful portion of the U.S. economy.
- ISM Services PMI: Fell to 50.8 (Estimate: 53.0)
- Services Employment: Contracted to 46.2
- New Orders: just above 50 at 50.4
- Prices Paid: Fell to 60.9
The negative economic data, combined with the uncertainty surrounding tariffs, amplified the market’s risk aversion. Equities experienced a broad sell-off,with European markets down between 2% and 3% and the Nasdaq plunging over 4% on the day.
Treasury Secretary’s Reassurances Fall Flat
In an attempt to calm market anxieties, then-Treasury Secretary Scott Bessent stated that tariffs could be quickly lifted if countries brought production back to the U.S. Bessent also cautioned against retaliation, warning that it could lead to even more tariffs.
“[Tariffs] could quickly be lifted or removed if countries bring back their production to the US. It’s best for countries not to retaliate as this could be considered the worst-case scenario if they want to avoid more tariffs.”
Scott Bessent, Former Treasury Secretary
However, these assurances did little to soothe investors, who remained concerned about the potential for a global trade war and the negative impact on economic growth.
Interest Rate Expectations Shift
the market turmoil also impacted expectations for future federal Reserve policy. According to the CME FedWatch Tool,the probability of interest rates remaining at the current range of 4.25%-4.50% at the May meeting increased to 74.7%. Furthermore, the odds of lower borrowing costs by June’s meeting stood at 72.5%. This indicates that investors anticipate the Fed might potentially be forced to pause or even reverse its interest rate hikes in response to the economic uncertainty.
The yield on the U.S. 10-year Treasury note,a benchmark for long-term interest rates,traded around 4.04%, just off its fresh five-month low of 4.01% as investors sought the safety of government bonds.
Technical Analysis: Dollar in Oversold Territory
From a technical viewpoint, the U.S. Dollar Index (DXY) experienced a significant breakdown, falling below the 102.00 level and testing support around 101.90. A break below this level could pave the way for further declines towards the 100.00 level.
Resistance levels to watch on the upside include 103.18, previously a support level, and the 200-day Simple Moving Average (SMA) at 104.90.
The Relative Strength Index (RSI) suggests that the dollar is currently in oversold territory,which could trigger a short-term bounce. however, the overall trend remains downward, and a sustained break below 101.90 could lead to further weakness.
